LAW    BOOKS 

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OF 

THE  UNIVERSITY 

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v 


THE 

LAW  OF  PROMOTERS 


A  TREATISE 

ON 

THE  LAW  OF  PROMOTERS  OF  PRIVATE    CORPORATIONS,   COVER- 
ING   THE    RIGHTS    AND    LIABILITIES    OF    PROMOTERS,    AND 
ALSO   THE   RIGHTS  AND   LIABILITIES  OF  THE   CORPORA- 
TION AND  THE  SUBSCRIBERS  FOR  AND  PURCHASERS 
OF  ITS  SHARES,  THE  RIGHTS  AND  LIABILITIES  OF 
PERSONS  SELLING  PROPERTY  TO  THE  CORPO- 
RATION,   AND    THE   RIGHTS   AND    LIABILI- 
TIES OF  ALL  OTHER  PERSONS   AS  AF- 
FECTED   BY    THE    ACTS    OR    OMIS- 
SIONS     OF     THE      PP          TERS. 


By  MANFRED  W.  EHRICH 

Of  the  New  York  Bar! 


ALBANY,  N.  Y. 
MATTHEW  BENDER  &  COMPANY, 

INCORPORATED 
1916 


COPYRIGHT,  1916, 
BY  MANFRED  W.  EHRICH 


PREFACE 

Practically  all  large  business  enterprises  are,  at  the  present 
day,  organized  in  corporate  form.  The  transactions  involved  in 
the  formation  of  these  corporations  are  often  intricate  and  of 
great  magnitude.  Yet  their  organization  is  in  the  main  the  work 
of  promoters — persons  who  have  no  official  connection  with  the 
future  corporation  and  who  occupy  toward  it  a  very  indefinite, 
and  in  some  respects  an  anomalous,  relation.  The  questions  of 
law  which  arise  from  the  acts  and  omissions  of  these  promoters 
are  difficult  and  complicated,  and  call  for  more  intensive  consider- 
ation than  can  well  be  accorded  them  in  any  general  work  on  cor- 
porations. No  work  on  promoters'  law  has  been  published  since 
1898,  and  in  the  eighteen  years  that  have  elapsed  many  interest- 
ing cases  have  been  decided.  That  there  is  need  for  a  reconsider- 
ation of  the  subject  there  can  be  no  doubt. 

Among  the  more  important  matters  covered  by  the  present 
book  are  agreements  for  the  promotion  of  corporations,  their 
validity,  interpretation  and  enforcement ;  contracts  made  by  the 
promoters  on  behalf  of  the  projected  corporation,  the  personal 
liability  of  the  promoters  thereon,  the  circumstances  under  which 
they  become  binding  upon  the  corporation,  and  the  power  of  the 
promoters  or  the  corporation  to  enforce  such  contracts ;  the  pro- 
moters' right  to  compensation  and  to  reimbursement  for  ex- 
penses ;  the  question  of  promoters'  profits  and  the  circumstances 
which  render  them  lawful  or  unlawful — a  matter  which,  under  the 
decisions,  depends  not  so  much  upon  the  fair  dealing  of  the  pro- 
moters as  upon  the  astuteness  of  their  attorneys — ;  the  remedies 
of  a  corporation  complaining  of  its  promoters,  and  the  defenses 


648915 


PREFACE. 

\ 

of  the  promoters  to  its  suits ;  false  representations  made  by  pro- 
moters, and  the  resulting  liability  to  the  corporation,  to  the 
subscribers,  and  to  other  persons,  and  the  defenses  of  the  pro- 
moters to  suits  based  on  such  representations ;  the  criminal  lia- 
bility of  promoters;  the  rights  and  liabilities  of  persons  sell- 
ing property  to  the  corporation  as  affected  by  the  acts  of  the 
promoters ;  the  relations  of  the  promoters  inter  se;  the  rights  and 
liabilities  of  promoters  reorganizing  or  consolidating  existing  cor- 
porations ;  and  the  rights  and  liabilities  to  be  adjusted  when  a  pro- 
jected corporaton  proves  abortive.  These,  together  with  many 
incidental  questions,  are  the  subject  matter  of  this  book. 

It  has  been  my  aim  to  write  for  the  busy  lawyer  as  well  as  for 
the  academic  student  of  the  law.  I  have  endeavored  to  state  the 
underlying  principles  upon  which  the  cases  of  promoters'  law 
depend,  and  to  analyze  the  puzzling  decisions  in  such  manner  that 
their  purport  may  readily  be  appreciated.  What  the  practicing 
lawyer  seeks  is,  however,  not  so  much  a  case  which  establishes 
some  broad  principle,  as  a  case  which  applies  that  principle  to  a 
situation  such  as  the  one  he  has  in  hand.  Whenever  I  have  met 
a  case  which  applies  an  established  principle  to  a  question  of  pro- 
moters' law,  or  applies  some  principle  of  promoters'  law  to  a  strik- 
ing state  of  facts,  I  have  noted  and  indexed  it  in  such  manner  that 
it  may  be  quickly  found.  I  have  in  my  examination  of  the  numer- 
ous lengthy  opinions  that  have  been  written  in  promoters'  cases 
found  many  statements,  perhaps  of  no  interest  from  an  academic 
point  of  view,  but  yet  of  great  value  to  the  lawyer  whose  case  in- 
volves the  particular  point.  Such,  for  example,  are  statements 
as  to  the  evidence  admissible  on  a  particular  question,  as  to  the 
inferences  that  may  be  drawn  from  a  given  state  of  facts,  as  to 
matters  of  pleading,  practice,  burden  of  proof,  jurisdiction,  and 
as  to  many  other  incidental  matters  which,  while  establishing  no 
new  principle  and,  perhaps,  involving  a  sufficiently  obvious  point, 
are  nevertheless  the  very  kind  of  precedent  which  it  is  most  diffi- 


PREFACE. 

cult  to  find  in  case  of  need.     All  such  statements  I  have  taken 
pains  to  note  and  index. 

I  wish  to  express  my  appreciation  of  the  helpful  assistance  re- 
ceived from  Mr.  Bertram  F.  Shipman  of  the  New  York  bar  and 
Mr.  Paul  J.  Bickel  now  of  the  Cleveland  bar. 

MANFRED  W.  EHRICH. 

Dated,  New  York,  April  15, 1916. 


TABLE  OF  CONTENTS. 


CHAPTER  I. 

OF  PROMOTERS  GENERALLY. 

PAGE. 

SECTION   1.  Introductory 1 

2.  Judicial  acceptance  of  the  term  promoter 2 

3.  Definitions   of   the   term 4 

4.  Circumstances  that  give  rise  to  the  relation 6 

5.  Sharing  promoter's  profits 9 

6.  Carrying  on  promotion  by  agents 9 

7.  Acting  as  vendor,  vendor's  agent,  etc 9 

8.  Bankers  and  solicitors,  not  promoters 11 

9.  Subscribers  for  shares,  not  promoters 12 

10.  Promoter's  partners  as  promoters 12 

11.  Corporations  as  promoters 13- 

12.  Use  of  the  word  promoter  in  America 14 

13.  Meaning  and  effect  of  the  term 15 

14.  Fiduciary   relation 16. 

15.  Inception  of  the  relation 21 

16.  The  same  subject. — Purchase  of  property  with  view  to  re- 

sale to  corporation 23 

17.  The  same  subject. — Taking  step  in  organization  of  cor- 

poration   25 

18.  The  same  subject. — An  illustrative  case 27 

19.  Termination  of  the  relation 28 

CHAPTER  II. 

Or  AGREEMENTS  FOR  THE  PROMOTION  OF  CORPORATIONS. 

SECTION   20.  Introductory 30 

21.  Validity  of  agreements  to  organize   corporation   to   pur- 

chase specific  property 31 

22.  Unenforceable  agreements 32 

23.  Validity  of  agreements  for  employment 34 

(1) 


ii  TABLE    OF    CONTENTS. 

PAGE. 

SECTION    24.  Invalid  agreements  for  employment 36 

25.  Validity  of  agreements  for  election  of  officers 38 

26.  Agreements  for  division  of  shares 39 

27.  Agreements  for  control  of  corporation 40 

28.  Property  rights  pending  promotion 41 

29.  Promoters'    certificates 41 

30.  Interpretation  of  agreements  for  sale  of  property  to  cor- 

poration   42 

31.  Performance  of  agreements  for  sale  of  property  to  cor- 

poration   45 

32.  Donating  shares  to  the  treasury A 46 

33.  Interpretation  of  agreements  relating  to  promoter's  com- 

pensation   47 

34.  Interpretation  of  agreements  for   division  of   profits  of 

promotion,  or  shares  of  corporation 49 

35.  Interpretation  of  agreements  restricting  sale  of  shares...  55 

CHAPTER  III. 

OP  THE  ENFORCEMENT  OF  AGREEMENTS  FOR  THE  PROMOTION  OP 

CORPORATIONS. 

SECTION   36.  Introductory 66 

37.  Specific    performance    of    agreements    to    promote    cor- 

poration   56 

38.  Specific  performance  where  corporation  has  not  been  or- 

ganized   57 

39.  Specific  performance  after  corporation  has  been  organized  58 

40.  Actions  of  accounting 62 

41.  Action  to  compel  corporation  to  issue  shares 63 

42.  Actions   for   damages. — Definiteness   of   agreement 64 

43.  Measure  of  damages 66 

44.  Action  to  recover  property  conveyed,  or  value  thereof 68 

45.  Actions  to  enforce  mechanics'  liens 71 

CHAPTER  IV. 

OP  CONTRACTS  MADE  FOR  THE  CORPORATION  BY  ITS  PROMOTERS. 

SECTION   46.  Power  of  promoter  to  make  contract  for  corporation 74 

47.  Power  of  promoter  to  make  contract  for  corporation  after 

granting  of  charter 77 


TABLE    OF    CONTENTS.  lii 

PAGE. 
SECTION    48.  Power  of  promoter  to  make  contract  for  corporation  after 

complete   organization 78 

49.  Liability  imposed  upon  corporation  by  act  of  incorpora- 

tion, or  articles  of  association 79 

50.  Assumption  of  liability  by  the  fully  organized  corporation.     80 

51.  Status    of   promoter's    contract    pending   action    of   cor- 

poration      83 

52.  Status  of  subscription  agreements  pending  action  of  cor- 

poration   85 

53.  Assumption  of  liability  by  agreement  of  corporation 88 

54.  The  act  of  assumption 92 

55.  Necessity  of  consideration 96 

56.  Liability    of    corporation    resulting   from    acceptance    of 

benefit  of  promoter's  contract 96 

57.  Enforcement  at  law  or  in  equity 100 

58.  Lord    Cottenham's    Rule 102 

59.  Obligation  of  corporation  to  pay  for  services  in  procuring 

contracts  accepted  by  it 107 

60.  Materiality  of  circumstance  that  original  contract  made 

by  less  than  majority  of  incorporators 109 

61.  Acceptance  must  be  with  full  knowledge 110 

62.  Liability  of  corporation  accepting  benefit  of  contract  not 

contemplating  performance  by  it 112 

63.  The  same  subject. — Contracts  of  a  continuing  nature....  114 

64.  The  same  subject. — Amended  contracts 114 

65.  The  same  subject. — Express  adoption 116 

66.  The   sanie  subject. — Obligations  cast  upon   assignee   by 

terms  of  contract 117 

67.  The  same  subject. — Where  corporation  is  organized   to 

escape  existing  obligations 117 

68.  Liability  of  the  corporation  as  affected  by  nature  of  par- 

ticular  agreement 118 

69.  Varying  written  agreement  of  promoter 121 

70.  Subscription    agreements 122 

71.  Notice  to  promoter  as  notice  to  the  corporation 125 

72.  Admissions   of  promoter 129 

73.  Enforcement  by  corporation  of  contract  made  by  promoter  130 

74.  Right  of  corporation  to  conveyance  of  property  purchased 

for   it   by   promoter 135 

75.  Effect   of    instrument   naming   projected    corporation    as 

grantee 136 

76.  Title  to'  property  which  corporation  is  expressly  organ- 

ized  to  acquire 139 


iv 


TABLE    OF    CONTENTS. 


PAGE. 
SECTION    77. ,  Liability  of  promoter  on  contract  made  for  corporation..  139 

78.  Liability  of  promoter  after  obligations  are  assumed  by 

corporation 144 

79.  Enforcement  of  contract  by  promoter 147 

80.  Pleading  the  promoter's  contract 149 

CHAPTER  V. 

OF  PROMOTION  EXPENSES. 

i 

SECTION   81.  Introductory ? 151 

82.  Promoter's  right  to  reimbursement  for  expenses 151 

83.  What    expenses    allowed 152 

84.  Compensation   for   services 154 

85.  Compensation  of  fraudulent  promoters 159 

86.  Compensation  for  services  in  obtaining  subscriptions 160 

87.  Amount  of  compensation  by  whom  fixed 161 

88.  Compensation  of  persons  employed  by  the  promoters. . . .  165 


CHAPTER  VI. 

OF  SECRET  PROFITS. 

SECTION   89.  Introductory 170 

90.  Basis  of  rule  against  secret  profits 171 

91.  Manner  of  taking  profit  immaterial 174 

92.  Taking  shares  as  compensation 175 

93.  Taking   commission   or    other   compensation   on   sale   to 

corporation 176 

94.  Accepting  gift  of  money,  qualifying  shares,  or  other  thing 

of   value 178 

95.  Profit  made  by  purchase  and  resale  to  corporation 180 

96.  Secret  collateral   agreements 182 

97.  Profits  made  in  sustaining  the  market 183 

98.  Other  collateral   profits 184 

99.  Profits  of  business  carried  on  with  existing  concern  pend- 

ing   incorporation 184 

100.  Absence  of  dishonest  intent,  or  of  injury  to  the  corpora- 

tion,   immaterial 185 

101.  Distinction  between   "secret   profits,"   and   sale  of  pro- 

moter's property  to  corporation 187 


TABLE    OF    CONTENTS.  v 

PAGE. 

SECTION  102.  Restrictions   upon  sale   of  promoter's   property   to  cor- 
poration  188 

103.  Necessity    of    determining    whether    promoter    acquired 

property  before,  or  after,  he  entered  upon  relation 192 

104.  What  is  deemed  acquisition  of  property 193 

105.  Property  acquired   by   gift 195 

106.  Promoter's  rights  under  contract  afterward  modified 196 

107.  Expired    options 197 

108.  Promoter   who   acquired   property   before  commencement 

of  relation,  sometimes  treated  as  though  he  had  ac- 
quired it  thereafter 198 

CHAPTER  VII. 

OF  LAWFUL  PROMOTER'S  PROFITS. 

SECTION  109.  Introductory 199 

110.  Disclosure   to   directors 202 

111.  Disclosure  to  subscribers 208 

112.  Nature  of  the  disclosure. — Constructive  notice 214 

113.  Waiver  of  disclosure 218 

114.  Facts  that  must  be  disclosed 219 

115.  Necessity  of  disclosing  price  paid  by  promoter 222 

116.  The  same  subject. — Effect  of  independent  board  of  di- 

rectors   226 

117.  Misrepresentations  as  to  cost  of  property 227 

118.  Ratification  of  promoter's  profits 227 

119.  Ratification  by  majority  stockholders,  or  by  directors....  228 

120.  Profits  where  promoters  themselves  the  sole  subscribers.  232 

121.  The  same  subject. — Basis  of  the  rule 235 

122.  The  same  subject. — Dummy  stockholders 238 

123.  The  same  subject. — Effect  of  promoters'  contract  to  sell 

shares 238 

124.  Legality  of  promoters'  profits  where  shares  subsequently 

sold  by  subscription 246 

125.  Effect  of  subsequent  issue  not  contemplated  at  time  of 

original    transaction 248 

126.  Effect  of  unsuccessful  attempt  to  sell  shares 249 

127.  Effect  of  subsequent  sale  of  shares  donated  to  treasury 

by    promoters 250 

128.  The  Old  Dominion  Copper  Company  litigations 255 

129.  The  same  subject — Subsequent  decisions 263 

130.  The  same  subject. — Discussion 265 


vi  TABLE    OF    CONTENTS. 

CHAPTER  VIII. 

OF  PROMOTERS'  DEFENSES  TO  SUITS  BY  THE  CORPORATION. 

PAGE. 
SECTION  131.  Introductory 271 

132.  Waiver  of  disclosure 271 

133.  Defense  that  shares  issued  to  promoter  had  no  value. . . .  272 

134.  Defense  that  promoter  guaranteed  obligations  of  the  cor- 

poration  273 

135.  Defense  that  profits  of  promoter  were  invested  in  notes 

of   corporation .' .* 274 

136.  Defense  that  profits  were  returned  to  co-promoter 274 

137.  Defense    that    promoter    surrendered    securities    to    cor- 

poration  274 

138.  Compromise  between  corporation  and  vendor  no  defense 

to  promoter 275 

139.  Defense  that  judgment   sought   would   compel   promoter 

to  pay  more  than  his  share  of  damages 276 

140.  Defense  that  other  guilty  promoters  would  be  benefited 

by  recovery 277 

141.  Defense  that  defrauded  syndicate  in  turn  defrauded  cor- 

poration  279 

142.  Defense  that  corporation  was  itself  guilty  of  fraud 279 

143.  Defense  that  moneys  taken  by  promoter  were  acquired  by 

corporation  in  an  unlawful  manner 280 

144.  Defense  that  plaintiff  suing  as  minority  stockholder  ac- 

quired his  shares  in  violation  of  statute 282 

145.  Defense    of    participation,    or    acquiescence,    of   plaintiff 

stockholder,  or  his  assignor 283 

146.  Defense  that  subscribers  had  no  knowledge  of  promoter's 

subscription  and  were  not  misled  thereby 285 

147.  Reorganization  of  corporation  as  defense 286 

148.  Defense  of  assignment  of  company's  claim  against  pro- 

moter  287 

149.  Defense  of  ulterior  purpose  on  part  of  plaintiff... 289 

150.  Defense  of  settlement  with  majority  stockholders 289 

151.  Statute  of  limitations 290 

152.  Laches 291 

153.  Corporation    not    chargeable    with    laches    until    after 

knowledge. 292 

154.  What  is  unreasonable  delay 293 

155.  Persons  whose  knowledge  may  be  charged  to  corporation  295 


TABLE    OF    CONTENTS.  vii 

PAGE. 
SECTION  156.  Defense  of  laches  as  depending  upon  nature  of  relief  asked.  296 

157.  Delay  as  defense  to  action  at  law  upon  a  rescission 297 

158.  Effect  of  judgment  for,  or  against,  co-promoter 298 

159.  Defense  of  bankruptcy 298 

CHAPTER  IX. 

OF  'THE  REMEDIES  OF  THE  CORPORATION. 

SECTION  160.  Introductory 300 

161.  Remedies  in  case  of  unlawful  sale  to  corporation  of  prop- 

erty purchased  by  promoter  for  his  individual  account.  301 

162.  Where  promoter  misrepresents  facts 306 

163.  Accounting  for  profits. — Rescission  unnecessary 308 

164.  Remedies  when  promoter's  profit  taken  in  money 309 

165.  Additional    remedies    when    promoter's    profit   taken   in 

shares 309 

166.  Remedies  when  promoter's  profit  taken  in  bonds,  or  other 

obligations,  of  corporation 315 

167.  Remedy  of  rescission   318 

168.  The  same  subject. — Rescission  of  entire  transaction 320 

169.  The  same  subject. — Methods  of  effecting  rescission 321 

170.  The  same  subject. — Restoration  of  status  quo 321 

171.  Action  for  fraud  and  deceit 323 

172.  Election  of  remedies 326 

173.  The  same  subject. — No  right  of  election  in  promoter 327 

174.  Remedies  of  corporation  where  promoter  receives  secret 

commission  or  other  benefit 328 

175.  Remedies  in  case  of  fraudulent  representations 330 

176.  Liability  of  directors,  officers,  etc 331 

177.  Cancellation  of  secret  agreements 332 

178.  Adequate  remedy  to  be  freely  granted 333 

CHAPTER  X. 

OF   SUITS   BY,   OR   ON 'BEHALF   OF,   THE   CORPORATION. 

SECTION  179.  Introductory 334 

180.  Suits  by  the  corporation 334 

181.  Suits  by  receiver  of  corporation 336 

182.  Minority  stockholders'  suits 337 


Viii  TABLE    OF    CONTENTS. 

PAGE. 
SECTION  183.  Stockholders'  suits  after  receivership 340 

184.  Suits  by  stockholders  other  than  original  subscribers 341 

185.  Further  of  minority  stockholders'  suits 343 

186.  The  same  subject. — Judicial  discretion 345 

187.  Rescission  at  suit  of  minority  stockholder 345 

188.  Minority  stockholder  intervening  to  defend  suit  against 

corporation 347 

189.  Suits  by  creditors  of  corporation 348 

190.  Parties    defendant 349 

191.  Actions  against  personal  representatives  of  deceased  pro- 

moter   351 

192.  Parties  defendant  in  minority  stockholders'  suits . .  * 352 

193.  Suits  at  law  and  in  equity 353 

194.  The  same  subject. — Rescission 354 

195.  Joinder  of  actions 355 

196.  Actions  against  promoters,  transitory 358 

197.  Conflict  of  laws 359 

CHAPTER  XI. 

OF  THE  PROMOTER'S  LIABILITY  FOR  FALSE  REPRESENTATIONS. 

SECTION  198.  Introductory 361 

199.  False  representations  in  prospectus 362 

200.  The  same  subject. — Who  entitled  to  sue  thereon 363 

201.  False   certificates 365 

202.  Indirect    misrepresentations 366 

203.  Liability  to  brokers 367 

204.  Liability  of  promoter  for  representations  of  his  agents . . .  367 

205.  Reliance  upon  false  statements 369 

206.  The  same  subject Agreement  not  to  rely  on  represen- 

tations  373 

207.  Knowledge  of  falsity  of  representations 373 

208.  Intent  to  deceive 381 

209.  Innocent  misrepresentation  as  ground  for  rescission 381 

210.  Fraud  by  concealment 384 

211.  The  same  subject. — The  English  Companies  Act 389 

212.  Materiality  of  representations 397 

213.  Materiality  of  concealment  of  mortgage 398 

214.  Materiality  of  representations  as  to  promoter's  profits 399 

215.  Materiality  of  representations  as  to  promoter's  interest..  400 

216.  Materiality  of  representations  as  to  identity  or  position  of 

persons  selling  property  to  corporation 403 


TABLE    OF    CONTENTS.  Ix 

PAGE. 
SECTION  217.  Materiality  of  representations  in  regard  to  directors 404 

218.  Materiality  of  representations  in  regard  to  subscriptions.  406 

219.  The   same  subject. — Sham  subscriptions 408 

220.  Materiality  of  representations  as  to  identity  of  subscribers.  411 

221.  Materiality  of  representations  as  to  price  paid  for  shares.  413 

222.  Materiality  of  representation  that  stock  sold  is  treasury 

stock 414 

223.  Misstatements  as  to  value  of  shares 415 

224.  Materiality  of  representations  as  to  legal  status  of  com- 

pany or  shares 416 

225.  Representations  as  to  future  action 417 

226.  Falsity  of  representations 418 

227.  Interpretation  of  prospectus 419 

228.  Interpretation  of  prospectus  in  light  of  particular  com- 

plainant  421 

229.  Interpretation    of    prospectus    in    light    of    preliminary 

character 422 

230.  Interpretation  of  ambiguous  statements  in  prospectus 422 

231.  Interpretation  of  particular  statements 425 

232.  Secret  profits  of  promoter  as  fraud  upon  subscribers 428 

233.  Secret  profits  of  promoter  as  fraud  upon  subsequent  pur- 

chasers of  shares 420 

234.  Misrepresentations  giving  rise  to  action  by  corporation. . .  433 

CHAPTER  XII. 

OF  THE  PERSONAL,  REMEDIES  OF  STOCKHOLDERS. 

SECTION  235.  Introductory 436 

236.  Action  for  fraud  and  deceit 436 

237.  Accounting  for  profits 438 

238.  Rescission   of   subscription 440 

239.  Rescission  because  of  secret  profit  of  promoter 446 

240.  Restoration  of  status  quo  as  condition  of  rescission 448 

241.  Methods  of  effectuating  rescission 449 

242.  Joinder   of   actions 451 

243.  Joinder  of  parties 451 


X  TABLE    OF    CONTENTS. 

CHAPTER  XIII. 

OF  DEFENSES  TO  SUITS  BY  INDIVIDUAL  STOCKHOLDERS. 

PAGE. 
SECTION  244.  Introductory I  454 

245.  Defense  that  no  benefit  accrued  to  promoter 455 

246.  Defense  that  promoter  urged  cancellation  of  subscriptions.  455 

247.  Absence  of  fraudulent  intent 456 

248.  Enterprise  doomed  to  failure  in  any  event 456 

249.  Prior  recovery   by  corporation /. . . .  457 

250.  Defense  that  property  in  relation  to  which  representa- 

tions   made,    not    sold    to    corporation    at    time    of 
plaintiff's     subscription 457 

251.  Defense  that  plaintiff  has  disposed  of  his  shares 458 

252.  Defense  of  election  to  disaffirm 459 

253.  Defense   that   plaintiff   might   readily    have   ascertained 

truth 459 

254.  Defense  that  representations  concerning  credit  of  another 

are  not  actionable  unless  in  writing 462 

255.  Defense  of  statute  of  limitations 462 

256.  Defenses  to  suits  for  accounting 463 

257.  Defenses  to  actions  for  rescission. — Election  to  affirm...  464 

258.  Acts  constituting  election 466 

259.  Effect  of  election  to  affirm 469 

260.  Defense  of  laches 469 

261.  Delay  as  defense  to  action  upon  a  rescission 472 

262.  Rescission  after  insolvency  of  corporation 473 

263.  Defense  that  oral  representations  were  merged  in  sub- 

scription   agreement 47S 

CHAPTER  XIV. 

OF  THE  MEASURE  OF  RECOVERY. 

SECTION  264.  Measure  of  recovery   in  case  of  unlawful   sale  of  pro- 
moter's property   to   corporation 481 

265.  In  action  for  accounting  for  profits 483 

266.  The     same     subject. — Allowance    as    compensation     for 

services 484 

267.  Unlawful   commissions,   bribes,   etc 485 

268.  Measure  of  recovery  upon  rescission 485 

269.  Measure  of  damages  in  case  of  false  representations 486 


TABLE    OP    CONTENTS.  ri 

PACK. 
SECTION  270.  Measure  of  value  of  shares 487 

271.  Measure  of  value  of  bonds 490 

272.  Value  of  property  sold  to  corporation 490 

273.  The  same  subject. — Market  value  the  standard 491 

274.  The  same  subject. — Proof  of  value 491 

275.  Measure  of  value  of  property  paid  for  by  subsequent  issue 

of  mortgage  bonds 492 

276.  Measure  of  recovery  in  minority  stockholders'  suits....  493 

277.  Measure  of  damages  in  action  for  fraud  in  sale  of  shares.  495 

CHAPTER  XV. 

OF  THE  CRIMINAL  LIABILITY  OF  PROMOTERS. 

SECTION  278.  Criminal  liability  for  fraud  upon  corporation 501 

279.  Accepting  qualifying  shares  from  persons  adversely  in- 

terested  501 

280.  Bubble    companies 502 

281.  Criminal  liability  for  fraud  in  sale  of  shares 502 

282.  The  English  Companies  Act 504 

283.  Fraudulent  use  of  the  mails 504 

CHAPTER  XVI. 

OF    VENDORS    OF    PROPERTY    AND    THEIR    REI.ATION    TO    THE 

PROMOTER. 

SECTION  284.  Introductory 505 

285.  Liability    of    vendor    for    misrepresentations    made    to 

promoter 506 

286.  Rescission   of   purchase   because  of  fraud   in   promotion 

committed  by  vendor's  agent 506 

287.  Responsibility  of  vendor  assisting  promoter  in  obtaining 

secret    profit 510 

288.  Liability  of  vendor  for  commission  to  be  paid  to  promoter.  514 

289.  The  same  subject. — Effect  of  compromise  between  vendor 

and   promoter 515 

290.  The  same  subject. — Liability  of  vendor  after  full  pay- 

ment to  promoter 515 

291.  Responsibility  of  vendor  of  property  for  false  represen- 

tations of  promoter  made  upon  sale  of  shares 518 

292.  Rights  of  vendor  receiving  payment  in  shares 521 


xii  TABLE    OF    CONTENTS. 

PAGE. 
SECTION  293.  Rights  of  vendor  receiving  payment  in  bonds 523 

294.  Rights  of  persons  donating  lands  to  corporation 524 

295.  Relation    inter   se   of   persons   selling   property   to   cor- 

poration  525 

CHAPTER  XVII. 

OF  THE  RIGHTS  AND  LIABILITIES  or  PROMOTERS  INTER  SE. 

SECTION  296.  Fiduciary  relation  of  promoters  to  each  other 527 

297.  Liability  of  promoter  carrying  out  proposed  plan  to  ex- 

clusion of  co-promoter 528 

298.  The   same   subject. — Promoter   carrying   out    plan   after 

rights  under  original  plan  have  lapsed 529 

299.  The  same  subject. — No  property  right  in  mere  idea 531 

300.  The  same  subject. — Rights  in  corporate  charter  obtained 

by    co-promoter 532 

301.  Frauds  of  promoters  upon  one  another  as  basis  of  action 

by   corporation 533 

302.  Promoters    not    partners 536 

303.  Liability  in  solido 539 

304.  Joint  liability  of  promoters  in  case  of  rescission 545 

305.  Contribution  between  promoters • 550 

306.  Promoter's  liability  for  compensation  of  co-promoter....  551 

CHAPTER  XVIII. 

OF  REORGANIZATIONS  AND  CONSOLIDATIONS. 

SECTION  307.  Introductory 552 

308.  Promotion  under  employment  of  corporation  to  be  reor- 

ganized  552 

309.  Promoter   relying   upon  express   agreement   for  compen- 

sation bound  to  show  performance  within  its  terms . . .  554 

310.  Necessity  of  disclosing  to  new  corporation  compensation 

paid  by  old  corporation 554 

311.  Payment   of  promoter's  fee  by   new  corporation,   not   a 

fraud  upon  rights  of  non-subscribing  stockholders  of 
old    corporation : . . . .  ^ 555 

312.  Reorganization    in   fraud    of   rights   of   minority    stock- 

holders  556 

313.  Retention   by   promoter   of   dividend   paid   pending   con- 

solidation  557 


TABLE    OF    CONTENTS.  xiii 

PAGE. 

SECTION  314.  New  corporation  not  necessary  party  to  suit  arising  out 
of  promoter's  fraud  upon  holders  of  securities  of  old 
corporation 558 

CHAPTER  XIX. 

OF  ABORTIVE  PROMOTIONS. 

SECTION  315.  Introductory 559 

316.  Expenses  of  attempted  organization  of  corporation 560 

317.  Compensation  of  promoters 563 

318.  Contribution    between    promoters 564 

319.  Subscribers  not  liable  for  expenses  of  abortive  promotion.  565 

320.  Circumstances  rendering  subscribers  liable  for  expenses.  565 

321.  Repayment  of  subscribers'   deposits 567 

322.  The  same  subject. — Circumstances  under  which  expenses 

may  be  deducted 568 

323.  Liability  upon  subscription  notes 569 

324.  Proof  of  abandonment  of  promotion 570 

325.  All  promoters  not  necessarily  liable  for  return  of  deposits.  572 

326.  Recovery  from  depositary 573 

327.  Rights  of  purchasers  of  shares  of  abortive  corporation. . .  574 

328.  Subscriber's  action  for  recovery  of  deposit 574 

329.  The  same  subject. — Voluntary  account  of  promoter  as  bar 

to  subscriber's  action  for  accounting 576 

330.  Accounting  by  promoters. — Disbursements  allowable 577 

331.  Disposition   of  property  acquired  pending  promotion  of 

abortive  corporation 579 

332.  Liability    of    promoters    of    defectively    organized    cor- 

poration  581 


TABLE  OF  GASES 


TABLE  OF  CASES. 

(The  references  are  to  the  pages.) 


Aaron's  Reefs  v.  Broadhurst — 385. 
Aaron's   Reefs   v.   Twiss — 214,   218, 

370,  377,  386,  389,   390,  398,  404, 

420,  428,  450,  451,  460,  461,  471, 

472,  473. 

Abbott  v.  Hapgood— 75,  81,  148. 
Abbott  v.  Omaha  Smelting  Co. — 581, 

584,  585,   587. 

Abel  v.  National  Reserve  Bank — 111. 
Aberaman  Ironworks  v.  Wickens — 

372,  462. 
Aberdeen   Railway   Co.   v.   Blakie — 

205. 

Ackerman  v.  Halsey — 340,  348,  353. 
Ada  Dairy  Ass'n  v.   Mears — 123. 
Adams  v.   Collins — 378. 
Adams    v.    Empire   Laundry    Mach. 

Co.— 98,  113. 
Adams  v.  Thrift— 375. 
Addison's   Case — 409. 
Addleston    Linoleum    Co.,    In    re — 

437. 

Admiral,  The— 127. 
Advance  Realty  Co.  v.  Nichols — 177, 

208,  219,  221. 
African  M.  E.  Church  v.  Conover — 

138. 
A.  J.  Cranor  Co.  v.  Miller— 13,  18, 

54,  523. 
Alabama   Foundry  &  Mach.  Works 

v.  Dallas— 399,  401,  409,  450. 
Albion  Steel  &  Wire  Co.  v.  Martin 

—184. 
Alden  v.  Wright — 496. 


Aldham  v.  Brown — 566,  568. 

Aldred  v.  North  Midland  Ry.  Co. — 
103. 

Alexander  v.   Searcy — 342. 

Alexander  v.  Winters — 81,  89. 

Alexandra  Oil  &  Dev.  Co.  v.  Cook— 
17,  18,  23,  25,  186,  198,  203,  206, 
307,  457,  459,  486,  533,  535,  539. 

Alger  v.  Anderson — 292,  322,  368, 
441. 

Allen  v.  Pulfer — 417,  418. 

Allman  v.  H.  R.  &  E.  R.  R.  Co.— 78. 

Alman  v.  Oppert — 375. 

Alsop  v.  Riker — 297. 

Altenberg  v.   Grant — 33,  34. 

Altoona,  etc.  Co.  v.  Kittanning,  etc., 
Ry.  Co.— 61. 

Ambrose  Lake  Tin  &  Copper  Min- 
ing Co.,  In  re— 182,  233,  235,  236, 
238,  252,  257,  303,  319,  324,  325, 
430,  431. 

American  Alkali  Co.  v.  Salom — 470. 

American  Bldg.  &  Loan  Ass'n  v. 
Bear— 405. 

American  Bldg.  &  Loan  Ass'n  v. 
Rainbolt — 405,  451,  465,  466,  472, 
473. 

American  Car  &  Foundry  Co.  v. 
Seeger  Refrigerator  Co. — 126. 

American  Home  Life  Ins.  Co.  v. 
Compere — 89,  124. 

American  Home  Life  Ins.  Co.  v.  Jen- 
kins—75. 

American  Paper  Bag  Co.  v.  Van 
Nortwick — 145. 


xvi 


TABLE   OF   GASES. 


(The  references  are  to  the  pages.) 


American  Radiator  Co.  v.  Kinnear 

—583. 
American  Salt  Co.  v.  Heppenheimer 

—583,  585,  586. 

American  Shipbuilding  Co.  v.  Com- 
monwealth  S.   S.  Co.— 16,  23,   25, 

160,   178,  277,   292,   298,   322,   336, 

355,  510,  511. 
American  Silk  Works  v.  Salomon — 

139. 

Ames  v.  Witbeck — 59. 
Amsinck's  Case — 562. 
Anderson  v.  Newcastle,  etc.,  R.  R. 

Co. — 409. 
Anderson  v.  West  Kentucky  College 

—131. 

Andres   v.   Morgan — 119. 
Andrews  v.  Mockford — 364. 
Angel  v.  Jay— 383. 
Anglo-French   Co-operative   Society, 

In  re— 20,  164,  274,  331. 
Anglo-Greek    Steam   Co.,    In   re — 3, 

174,  178,  179,  183,  217. 
Angus    v.    Clifford— 362,    374,    404, 

420,  423,  425. 
Anthony  v.  American  Glucose  Co. — 

63, 

Apperly  v.   Page — 575. 
Apps,  Ex  parte — 566,  577. 
Arapahoe  Inv.  Co.  v.  Platt— 74,  93, 

95. 
Archer's   Case— 175,   179,   180,    186, 

201,  203. 
Arkansas  River  L.  T.  &  C.   Co.   v. 

Farmer's  L.  &  T.  Co.— 282,  283.  • 
Arkwright    v.     Newbold — 177,     377, 

382,  386,   390,  406,  423,  426,  429, 

497,  499. 
Armstrong  v.  American  Exch.  Bk.  of 

Chicago— 281,  282. 
Armstrong  v.   Danahy — 409,   571. 
Armstrong  v.  Sun  Printing  &  Pub. 


Ass'n — 6. 
Arnison  v.  Smith— 370,  372,  374,  407, 

420,  423,  452,  469,  497,  499. 
Arnold  v.  Conklin — 536. 
Arnold   v.   Northwestern  Telephone 

Co.— 536. 
Arnold  v.  Searing— 7,  18,  19,  22,  25, 

171,  172,  181,  200,   203,  208,   211, 

212,   214,   215,   216,   233,   235,   236, 

239,   245,   247,   265,   274,   282,   302, 

309,  310,  311,   313,  314^  336,  337, 

348,  349,  488,  489,   490,  535,  544. 
Arnold  v.  Teel— 378. 
Arnold    Monophase   Electric   Co.   v. 

Chew— 131. 

Arthur  v.  Griswold — 369. 
Ashbury  v.  Watson — 284. 
Ashley's  Case — 474,  478. 
Ashmead  v.  Colby— 323,  357,  358, 

538. 

Ashpitel  v.  Sercombe — 568,  574. 
Ashuelot  Boot  &  Shoe  Co.  v.  Holt 

—131. 

Askew's  Case — 388,  391. 
Aspen  Water  &  Light  Co.  v.  Aspen 

—137,  139. 
Athol  Music  Hall  Co.  v.  Carey — 84, 

87,   131. 

Atkinson  v.  Pocock — 383. 
Atlanta  &  West  Point  R.  R.  Co.  v. 

Hodnett— 69. 
Atlantic  City  R.   R.  Co.   v.  Wood— 

75,  135. 
Atlantic  &  Birmingham  Ry.  Co.  v. 

Johnson,  118,  120. 
Attorney    General    for    Canada    v. 

Standard  Trust  Co.  of  N.  Y.— 236. 
Attwood  v.  Small-^372. 
Atwool   v.   Merryweather — 176,  231, 

232,  347,  511. 
Auburn  Bolt  &  Nut  Works  v.  Shultz 

—87. 


TABLE    OF    CASES. 


xvii 


(The  references  are  to  the  pages.) 


Audenried  v.  East  Coast  Milling  Co. 
—124. 

Austin  v.  Murdock — 435,  437. 

Austin  v.  Tecumseh  Nat'l  Bank — 
119,  120. 

Averill  v.  Barber— 136,  264,  339,  345, 
446. 

Avery  v.  Ryan — 57,  58,  63. 

Avon  Springs  Sanitarium  Co.  v.  Kel- 
logg—132. 

Avon  Springs  Sanitarium  Co.  v. 
Weed— 88,  132. 

Ayre's  Case — 442. 

B. 

Babbitt  v.  Gibbs— 554. 

Babcock  v.  Farwell— 205,  283,  284. 

Badger  Paper  Co.  v.  Rose — 78,  82, 
85. 

Badgerow  v.  Manhattan  Trust  Co. 
—63. 

Bagnall  v.  Carlton— 10,  11,  17,  18, 
23,  25,  28,  152,  155,  160,  172,  175, 
176,  178,  179,  180,  186,  188,  221, 
275,  292,  297,  328,  351,  388,  511, 
539. 

Bagot  Pneumatic  Tyre  Co.  v.  Clif- 
ford Pneumatic  Tyre  Co. — 93,  112, 
115,  117. 

Bagshaw  v.  Eastern  Union  Ry. — 
338,  346. 

Bailey  v.  Haines — 144. 

Bailey  v.  Macaulay — 537,  561. 

Bailey  v.  Pittsburg  &  C.  G.  C.  &  C. 
Co.— 247. 

Baily  v.  Burgess— 158,  551,  564. 

Baird  v.  Ross— 567,  568. 

Baker  v.  Guarantee  Trust  &  Safe 
Deposit  Co. — 317. 

Baker  v.  Lever — 470. 

Baker  Furniture  Co.  v.  Hall — 119. 


Balfour  v.  Baker  City  Gas  Co. — 87. 
Ball  v.  Gerard — 463. 
Ballantine  v.  Cummings — 416. 
Ballou,  In  re— 74,  89,  163. 
Baltimore  Trust  &  Guarantee  Co.  v. 

Hambleton — See     Hambleton     v. 

Rhind. 

Bane  v.  Dow — 114. 
Bang  v.  Brett — 125. 
Bank  of  De  Soto  v.  Reed — 585. 
Bank   of  Forest   v.   Orgill   Bros.   & 

Co.— 75. 

Bank  of  South  Carolina   v.  Camp- 
bell—147. 
Bank  of  Turkey  v.  Ottoman  Co. — 

163. 

Bannen  v.  Kindling — 63. 
Banque  Franco-Egyptienne  v.  Brown 

—20,  417,  418,  421,  422,  441. 
Barber  v.  Morgan — 415. 
Barbour   v.    Hurlburt — 440,   448. 
Barcus  v.  Gates— 282,  357,  358,  441, 

464. 

Barker  v.  Lyndon — 560. 
Barker  v.  Stead— 537,  560. 
Barnes  v.  Union  Pacific  Ry.  Co. — 

377. 

Barnett  v.  Lambert — 562. 
Barr  v.  N.  Y.  L.  E.  &  W.  R.  R.  Co. 

—236,  258,  297,  321. 
Barrett  v.  Blunt — 562. 
Barren   v.   International  Trust  Co. 

—563. 

Barry  Ry.  Co.,  In  re— 29,  578. 
Bartholomew  v.  Bentley — 584. 
Bartol  v.  Walton  &  Whann  Co.— 371, 

382,  478. 

Barton  v.  Hutchinson — 140. 
Bash  v.  Culver  Gold  Mining  Co. — 

113. 

Batard  v.  Douglas — 144,  537. 
Batard  v.  Hawes— 144,  167. 


xviii 


TABLE    OF    CASES. 


(The  references  are  to  the  pages.) 


Bateman  v.  Straus — 59,  62. 

Bates  v.  Wilson — 49. 

Battele  v.  Northwestern  Cement  & 

Concrete  Pavement  Co. — 75,  76,  82, 

90,  91,  93. 

Baty  v.  Keswick— 371,  391,  394,  422. 
Baumhoff  v.    St.   Louis  &  K.  R.  R. 

Co.— 59. 

Beal  v.  Chase — 117. 
Beal  v.  Dillon— 477. 
Beale  v.  Mouls — 143. 
Bear  v.  Stevenson — 369. 
Beardshaw,  Ex  parte — 565,  569. 
Beare  v.   Wright — 495. 
Beatty   v.   Guggenheim  Exploration 

Co.— 220,  221. 

Beatty    v.    Neelon— 290,    429,    437, 
496,  521,  526,  533. 
Beaty  v.  Johnston — 67,  68. 
Beaunisne  v.  Scholz — 566,  570. 
Beck  v.  Kantorowicz— 176,  308,  527, 

533. 

Bedford  v.  Bagshaw— 366. 
Bedford    &    Cambridge    Ry.    Co.    v. 

Stanley— 130. 
Bedwell  v.  Ashton— 587. 
Beeching  v.  Lloyd — 452. 
Belding  v.  Vaughan — 141,  142. 
Belding  Land  &  Imp.  Co.  v.  City  of 

Belding— 140. 
Beling  v.  Amer.   Tobacco  Co. — 284, 

296. 

Bell  v.  Francis — 140. 
Bell  v.  Shibley— 98. 
Bell's  Gap  R.  R.  Co.  v.  Christy — 

78,  102,  109,  140,  155. 
Bellairs    v.    Tucker,    268,    362,    369, 

421,  42a 
Belton  Compress  Co.  v.  Saunders — 

86. 
Benedict  v.   Guardian  Trust  Co. — 

437. 


Bennecke  v.  Insurance  Co. — 111. 

Bennett  v.  Havelock  E.  L.  &  P.  Co. 
—203,  247,  511. 

Bennett  v.  Stuart — 33. 

Bensinger  v.  Kantzler — 38. 

Bent  v.  Priest — 290. 

Bentinck  v.  Fenn— 182,  189,  190, 191, 
201,  202,  204,  205,  219,  223, 
231,  303,  305,  306,  319,  321,  325, 
326,  341,  427,  482,  483,  489,  492. 

Bentley  v.  Craven— ^.73,  180,  186, 
309. 

Benton  v.  Kuykendall — 378. 

Benton  v.  Minneapolis  Tailoring 
&  Mfg.  Co.— 8,  12. 

Bergen  v.  Porpoise  Fishing  Co. — 
118. 

Bergeron  v.  Hobbs— 581,  584,  585, 
586. 

Bernard's  Case — 442. 

Bernier  v.  Griscom  Spencer  Co. — 58. 

Berridge  v.  Abernethy — 75. 

Berthold  v.  Holladay-Klotz  Land, 
etc.,  Co.— 119. 

Besley,  Ex  parte — 560,  561. 

Besly's  Case— 560,  561. 

Bevan  v.  Adams — 407. 

Big  Creek  Gap  Coal  and  Iron  Co.  v. 
American  Loan  &  Trust  Co. — 348. 

Bigelow  v.   Gregory — 581,  585. 

Bigelow  v.  Old  Dominion  Copper, 
etc.,  Co.^i,  17,  25,  33,  152,  157, 
171,  173,  186,  187,  200,  201,  202, 
203,  208,  211,  213,  228,  239,  247, 
259,  263,  265,  288,  298,  305,  313, 
314,  336,  349,  358,  359,  482,  488, 
491,  539,  543,  550. 

Bigge,  Ex  parte — 444. 

Birmingham  &  Lichfield  Junction 
Ry.  Co.,  In  re— 579. 

Bissell  v.  Heath— 474. 


TABLE    OF    CASES. 


six 


(The  references  are  to  the  pages.) 


Bjorngaard  v.  Goodhue  County  Bk. 

—232. 

Blackstone,  Ex  parte — 471. 
Blain  v.  Agar— 2,  404,  444. 
Blair  Open  Hearth  Furnace  Co. 

Ltd.,  In  re— 396. 

Blake's  Case— 404,  407,  441,  476. 
Blakely  Ordnance  Co.,  In  re — 80. 
Eland's  Case— 177,  196,  272,  313. 
Bland  v.  Crowley— 106. 
Bliss   v.    Linden   Cemetery   Ass'n — 

247. 

Blodgett  v.  Morrill — 409. 
Blood  v.  La  Serena  L.  &  W.  Co. — 

9,  10,  77. 

Bloom  v.  Home  Ins.  Agency — 89. 
Blum    v.    Whitney— 224,    233,    237, 

255,  258,  430,  523,  535. 
Bobzin  v.  Gould  Balance  Valve  Co. 

—97,  121,  124,  127,  480. 
Boddy  v.  Henry— 376. 
Bogard  v.  Sweet — 137. 
Bohmrich  v.   Knoop— 283,  315,  338, 

339. 
Bohn     v.     Burton-Lingo     Co. — 413, 

476,  477. 
Bohn   Mfg.    Co.    v.    Reif— 142,    146, 

147. 

Boice  v.  Jones — 514,  525,  526. 
Boice  v.  McCormick — 12. 
Boldenweck  v.  Bullis— 284,  342,  344. 
Bolton  v.  Prather — 416. 
Bommer   v.   Am.    Spiral,   etc.,   Mfg. 

Co.— 98. 
Bond  v.  Atlantic  Terra  Cotta  Co. — 

41,  75. 

Bond  v.  Pike— 75,  90,  93,  95. 
Bonham  Cotton  Compress  Co.  v.  Mc- 

Kellar— 130. 
Bonsall  v.  Platt— 145. 
Booth  v.  Bunce— 117. 
Booth  v.  Englert— 378. 


Booth   v.   Robinson — 354. 

Bosher  v.  Richmond  &  H.  Land  Co. 

—6,  17,  441,  446,  452,  453,  460. 
Bosley  v.  Nat'l  Mach.  Co. — 450. 
Boston  Deep  Sea  Fishing  &  Ice  Co. 

v.  Ansell,  89,  121. 
Botsford  v.  Van  Riper — 528,  538. 
Boulter  v.  Peplow — 144,  537. 
Boushall  v.  Myatt— 122. 
Bowen  &  Martin,  Ex  parte — 566. 
Bracher  v.   Hat   Sweat   Mfg.   Co. — 

35. 

Brackbill  v.   Bucher — 568. 
Brackett  v.  Griswold — 360. 
Braddock  v.  Phila.  M.  &  M.  "R.  R. 

Co.— 572. 

Bradford  v.  Harris — 569. 
Bradford  v.  Metcalf— 75,  81,  82,  120. 
Bradford  &  District  Tramways  Co., 

Ex  parte — 579. 
Bradley  v.  Poole — 397. 
Bradshaw   v.   Jones — 140,   141,   142, 

146. 

Bradshaw  v.  Knoll — 75. 
Brampton  &  Longtown  Ry.  Co.,  In 

re— 79,  156,  579. 
Brautigam  v.  Dean  &  Co. — 93. 
Brazilian  Rubber  Plantations  &  Es- 
tates Ltd.,  In  re— 202. 
Brehm  v.   Sperry,  Jones  &  Co. — 39, 

64,  293,  294,  311,  460,  521,  523. 
Bremen     Sav.     Bank     v.     Branch 

Crookes  Saw  Co. — 119. 
Bremner  v.  Chamberlayne — 167,  561. 
Brennan  v.  Vogler — 47. 
Breslin    v.    Fries-Breslin    Co. — 236, 

315. 
Brewer  v.  Boston  Theatre — 339,  340, 

346. 
Brewster   v.    Hatch— 7,   19,   21,   23, 

214,  215,  221,   224,  239,  358,  428, 

430,  538. 


TABLE    OF   CASES. 
(The  references  are  to  the  pages.) 


Bridgeport    Electric   &    Ice    Co.    v. 

Meader— 89. 
Brigg's  Case— 398. 
Briggs,  Ex  parte— 217,  461,  467. 
Bright's  Case— 562. 
Bright  v.  Hutton— 561,  562. 
Brighton  Brewery  Co.,   In  re,  The 

—179. 
Brinckerhoff  v.  Bostwick— 296,  339, 

340,  353,  354. 

Brinkerhoff  v.  Ransom — 126. 
British  Provident  Life  &  Guarantee 

Ass'n,    In    re — See   De   Ruvigne's 

Case. 
British  Seamless  Paper  Box  Co.,  In 

re— 20,    203,    236,    247,    249,    267, 

441. 

Brittain,  Ex  parte — 562. 
Broadus  v.  Russell — 569. 
Broadwell  v.  Merritt— 138. 
Brockwell's  Case — 411. 
Broderip  v.  Salomon— 236,  247. 
Brolaski  v.  Carr — 460. 
Bronson  v.  La  Crosse  &  Milwaukee 

R.  R.  Co.— 347. 
Brooke  v.  Day — 584. 
Brooker    v.    William    H.    Thompson 

Trust    Co.— 6,    16,    172,    213,    218, 

233,  237,  319,  326,  430. 
Brookes  v.  Hansen — 395. 
Brooks  v.  Bonner — 139. 
Brooksville  R.  Co.  v.  Byron — 87. 
Broome  v.  Speak— 389,  390,  391,  394, 

398,  497,  498,  500. 
Brotherton  v.  Gilchrist — 537. 
Brown,  Ex  parte — 405,  419. 
'Brown  v.  Andrew — 561,  562. 
Brown  v.  Bedford  City  Land  &  Im- 
provement Co. — 358,  452. 
Brown  v.  Bracking — 40. 
Brown  v.  Britton — 37,  62. 
Brown  v.  Duluth  M.  &  N.  Ry.  Co. — 


284,  338. 

Brown  v.   Florida  So.   Ry.  Co.  —  49. 
Brown  v.  Swarthout  —  57. 
Browne  v.  La  Trinidad  —  80. 
Browne  v.  San  Gabriel  River  Rock 


Browne  &  Jenkins  Co.  Ltd.,  In  re  — 

581. 
Browning  v.  Great  Central  Min.  Co. 

—93,  95. 

Brownlie   v.    Campbell—  373. 
Broyles  v.  McCoy  —  120. 
Brundred  v.  Rice  —  582. 
Bruner   v.    Brown  —  80. 
Bryant's   Pond    Steam    Mill   Co.   v. 

Felt—  86,    87. 
Buerstetta    v.   Tecumseh   Nat'l   Bk. 

—119. 
Buffalo  &  Jamestown  R.  R.  Co.  v. 

Gifford—  570. 
Buffalo  &  N.  Y.  City  R.  R.  Co.  v. 

Dudley  —  444. 
Buffington   v.    Bardon—  76,    98,   102, 

111,  143. 

Buker  v.  Leighton  Lea  Ass'n^468. 
Bull  v.  Chapman  —  78. 
Bullitt  v.  Farrar—  378,  379. 
Burbank  v.  Dennis  —  5,  20,  23,  26,  27, 

186,   187,   193,  194,   198,  206,   222, 

224,   225,  227,  230,  307,  327,  338, 

361,  399. 

Burbidge  v.  Morris  —  561. 
Burden  v.  Burden  —  41,  55,  346. 
Burdette   v.    Universal   Cleanser   & 

Mfg.   Co.^54. 
Burgess's  Case  —  474. 
Burgess  v.  Sherman  —  143.    ' 
Burhop  v.  City  of  Milwaukee  —  139. 
Burke  v.  Lincoln  Valentine  Co.  —  90, 

91. 
Burke  v.  Mead—  62,  87,  148. 


TABLE   OF   CASES. 


xxl 


(The  references  are  to  the  pages.) 


Burland  v.  Earle— 24,  264,  303,  337, 

346. 

Burnap  v.  Sylvania  Butter  Co. — 72. 
Burnes  v.  Pennell — 427,  444,  503. 
Burns  v.  Beck— 365. 
Burns  v.  McCabe— 399,  449,  538. 
Burnside   v.    Dayrell — 573. 
Burrowes  v.  Lock — 486. 
Burrows  v.  Smith— 122,  571. 
Burt  v.   Batavia   Paper  Mfg.   Co. — 

125. 
Burwash    v.    Ballou — 414,   415,   416, 

421,  443. 

Busch  v.  Wilcox — 438. 
Buschmann  v.  Codd — 496. 
Bushnell   v.   Consolidated   Ice   Ma- 
chine Co.— 584,  585. 
Business  Men's  Ass'n  v.  Williams — 

87. 

Busterud  v.  Farrington — 400. 
Butler  v.  Murphy— 59,  62. 
Butler   v.    Prentiss— 382. 
Butler  v.  Wright— 61,  62. 
Butt   v.    Monteaux — 572. 
Butterfleld  v.  Harris — 41. 
Bwlch-Y-Plwm  Lead  Mining  Co.  v. 

Baynes — 450. 

Byers  Bros.  v.  Maxwell— 373,  382. 
Byrne  &  Hammer  Dry  Goods  Co.  v. 

Willis-Dunn   Co.— 119,    120. 

c. 

C.  &  K.  Turnpike  Road  Co.  v.  Mc- 
Conaby — See  Centre  &  K.  Turn- 
pike Road  Co.  v.  McConaby. 

Cabot  v.  Christie— 376,  378. 

Cackett  v.  Keswick— 389,  390,  392, 
394,  406,  497,  499. 

Caerphilly  Colliery  Co.,  In  re — 
See  Pearson's  Case  and  Orme- 
rod's  Case. 


Caffee  v.  Berkley— 18,  151,  157,  159, 
181,  202,  214,  218,  290,  388. 

Cahill  v.  Applegarth— 376,  377. 

Caldwell  v.  Boyd — 429,  430. 

Caledonian  &  Dumbartonshire  Junc- 
tion Ry.  Co.  v.  Magistrates  of 
Helensburgh— 3,  76,  103,  105,  113, 
120,  140. 

California-Calaveras  Min.  Co.  v. 
Walls— 23,  233,  238,  246,  250,  265, 
316,  317,  434. 

California,  etc.,  Min.  Co.  v.  Manley 
—125,  127. 

California  Sugar  Mfg.  Co.  v.  Schafer 
—88,  132. 

Calivada  Colonization  Co.  v.  Hays — 
163. 

Calthorpe  v.  Trechmann — 219,  370, 
390,  392,  393,  394. 

Camden  Land  Co.  v.  Lewis — 19,  20, 
136,  232,  238,  246,  305,  310,  319, 
357,  358. 

Campbell  v.  Cypress  Hills  Cemetery 
—177,  247,  317. 

Campbell  v.  Farmers'  &  Merchants! 
Bank— 119. 

Campbell  v.  First  Nat'l  Bk.  of  Den- 
ver— 128. 

Campbell  v.  Fleming — 467. 

Campbell  v.  Zion's  Co-op.  Home 
Bldg.,  etc.,  Co. — 415,  444. 

Canadian  Agency  Ltd.,  The  v.  As- 
sets Realization  Co. — 382. 

Canadian  Direct  Meat  Co.,  In  re — 
441. 

Canadian  National  Oil  Co.,  In  re — 
See  Fox's  Case. 

Canadian  Oil  Works  Corporation,  In 
re — See  Hay's  Case. 

Cantwell   v.   Harding — 459. 

Cape  Breton  Co.,  In  re — 182,  189, 
190,  191,  204,  219,  223,  231,  303, 


xxii 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


305,  306,   319,  320,  321,  324,  482, 

489*. 

Capel  &  Co.  v.  Sim's  Ships  Compo- 
sition Co.— 371,  392,  401,  421,  423, 

442,  446,   447,  453,  460,   497. 
Capper's  Case— 537,  565,  568. 
Capps  v.  Hastings  Prospecting  Co. — 

88. 

Card  v.  Moore — 41. 
Carden  v.  General  Cemetery  Co. — 79, 

156. 

Carew's  Case — 104,  405,  566. 
Carey  v.  Coffee  Stemming  Machine 

<30 —441,  452,  453. 
Carey  v.  Des  Moines  Co-op.  Coal  & 

Min.   Co. — 74. 

Cargill  v.  Bower— 369,  398,  537. 
Carling's  Case— 178,   179,   310,   312, 

313,  314,  488,  489. 
Carlisle  v.  Saginaw,  etc.,  R.  R.  Co. 

—87. 

Carmichael's   Case — 562. 
Carmody   v.   Powers — 75,   140. 
Carnahan  v.  Campbell — 122. 
Carpenter's  &  Weiss's  Case — 561. 
Carriage  Co-operative  Supply  Ass'n, 

In  re— 178,  488,  489,  539. 
Carrick's  Case— 560,  561,  565,  574. 
Carter  v.  Gray— 117,  126. 
Carter  v.  Tucker — 12. 
Case  Mfg.  Co.   v.   Soxman — 146. 
Cass  v.  Pittsburg  V.  &  C.  Ry.  Co.— 

123. 

Caswell  v.  Hunton — 397,  414. 
Cazeaux  v.  Mali— 363,  364,  366,  378, 

389,  455. 
Cedar  Rapids  Gas  Light  Co.  v.  Cedar 

Rapids— 152. 
Cedar  Rapids  Ins.  Co.  v.   Butler — 

470,  478. 
Central   Land   Co.    v.    Obenchain — 

177,  178. 


Central   Nat.   Bk.   v.    Sheldon— 581, 

585. 
Central  Park  Fire  Ins.  Co.  v.  Cal- 

laghan — 99. 
Central    Railway    of    Venezuela    v. 

Kisch — See     Directors,     etc.,     of 

Central  Railway  Co.  of  Venezuela 

v.  Kisch. 
Central  Trust  Co.  v.  East  Tennessee 

Land  Co.— 24,  286,  305,  326,  481. 
Central  Trust  Co.   of   Pittsburg   v. 

Lappe— 135. 
Centre  &  K.  Turnpike  Road  Co.  v. 

M'Conaby-^67,  471. 
Chamberlain  v.  Trogden — 474. 
Chambers  v.  Mittnacht— 39,  64,  195. 
Champion  Funding  &   Foundry  Co. 

v.  Heskett— 369,  415. 
Chandler  v.  Bacon— 18,  177,  185,  310, 

312,  328,  329,  488,  538,  539. 
Chaplin  v.  Clarke— 570. 
Chapman  v.   Forsyth — 299. 
Charitable  Corp.  v.  Sutton— 335. 
Charles  F.  Hollwedel  Co.   v.  Auer- 

bach  &  Co.— 133,  138. 
Charlotte,  etc.,  R.  R.  Co.  v.  Blakely 

— S7. 

Charlton  v.  Hay— 390,  392. 
Chase   v.   Redfleld   Creamery  Co. — 

89,  90,  91,  93,   127. 
Chater  v.  San  Francisco  Sugar  Re- 
fining Co.— 39,  64. 
Chatham  Furnace  Co.  v.  Moffatt — 

377,  379. 
Cheney  v.  Dickinson — 364,  445,  450, 

455. 

Chesapeake  &  Ohio  Ry.  Co.  v.  Deep- 
water  R.  Co. — 137. 
Chesbrough  v.  Woodworth — 496. 
Cheseborough  v.  North  Second   St., 

etc.,  R.  R.  Co.— 92. 
Chester  v.  Comstock — 376. 


TABLE    OF    CASES. 


xxiii 


(The  references  are  to  the  pages.) 


Chester  v.  Spargo— 398. 

Chicago  Bldg.  &  Mfg.  Co.  v.  Beaven 

^444. 

Chicago  Bldg.  &  Mfg.   Co.   v.  Gra- 
ham— 71. 
Chicago  Bldg.  &  Mfg.  Co.   v.   Tal- 

botton,  etc.,  Mfg.  Co.— 76,  145. 
Chicago   City   Ry.    Employees   Mut. 

Aid  Ass'n  v.  Hogan — 119. 
Chicago    Tel.    Co.    v.    Northwestern 

Tel.  Co.— 137. 
Chicago  &  Grand  Trunk  Ry.  Co.  v. 

Miller— 120. 
Chilcott  v.  Wash,  State  Colonization 

Co.— 76,  SI,  96,  102,  145. 
Childs  v.  Smith— 42. 
Chouteau  Ins.  Co.  v.  Floyd — 409. 
Christineville  Rubber  Estates  Ltd., 

Re— 386,  399,  470. 
Chubb  v.  Upton — 473,  478. 
Chubbuck  v.  Cleveland— 366. 
Church  v.  Church  Cementico  Co. — 

75,  90,  95,  96. 
Church   of   St.    Stanislaus   v.   Alge- 

meine  Verein — 136. 
Cincinnati,  Ind.  &  Chic.  R.  R.  Co. 

v.  Clarkson— 160. 

Citizens  Loan  Ass'n  v.  Lyon — 354. 
Citizens'  Nat'l  Bank  v.  Elliott— 121. 
City  Bank  of  Macon  v.   Bartlett — 

358,  465. 
City    Bldg.    Ass'n    v.    Zahner— 102, 

166,  169. 

Clark  v.  American  Coal  Co. — 342. 
Clark  v.  Barnes— 88. 
Clark  v.  McManus — 567,  568. 
Clark  v.  Morgan  Co.  National  Bank 

-^159,  499. 

Clarke,  Ex  parte — 561. 
Clarke    v.    Dickson— 362,    363,    370, 

401,  420,  448. 
Clarke  v.  Lincoln  Lumber  Co. — 33. 


Clarke  v.  Mercantile  Trust  Co. — 355, 

450,  453,  455,  459,  465,  495,  537. 
Clarke  v.  Omaha  &  S.  W.  R.  R.  Co. 

—78,  96,  109. 
Clarke  v.  Rogers — 299. 
Clarksburg  Elec.  Light  Co.  v.  City 

of  Clarksburg— 137. 
Clarksburg,  etc.,  Land  Co.  v.  Davis 

—122,  124,  131,  466,  480,  571. 
Cleaton  v.  Emery— 582. 
Clements  v.   Bowes — 575,  576. 
Clements  v.   Sherwood-Dunn — 59. 
Clements  v.  Todd— 568. 
Clergue  v.  Humphrey — 140. 
Cleveland    Iron    Co.,    Re — See    Ex 

parte  Stevenson. 
Cleveland  Iron  Co.  v.  Stephenson — 

424. 

Clinton's  Claim— 99. 
Clough  v.  London  &  Northwestern 

Ry.  Co.— 473. 
Coal  Economizing  Gas  Co.,  In  re — 

See  Cover's  Case. 
Coalter  v.  Bargamin — 586. 
Coats,  Ltd.  v.  Crossland— 392. 
Cobb  v.  Hatfield--466,  472. 
Coca  Cola  Bottling  Co.  of  Chicago 

v.  Anderson — 415. 
Cochran  v.  Arnold — 365. 
Coe  v.  Leckrone  Coke  Co. — 121. 
Coffin  v.  Barber — 463. 
Coit   v.   Dowling— 76,  112,  140. 
Cole  v.  Cassidy— 377. 
Coleman  v.  Second  Ave.  R.  R.  Co. 

—189. 

Coles    v.    Kennedy— 397,   409. 
Collingwood  v.  Berkeley — 143. 
Collins  v.  Southern  Brick  Co. — 480. 
Colorado    Land    &    Water    Co.    v. 

Adams— 74,  95,  140. 
Colquitt  v.  Howard— 139. 
Colt  v.  Woollaston— 567. 


xxiv 


TABLE   OF   CASES. 


(The  references  are  to  the  pages.) 


Colton  Improvement  Co.  v.  Richter 
—17,  172,  201,  205,  208,  211,  224, 
309,  316,  317,  329,  336,  338. 

Columbine  v.  Chichester — 61. 

Commercial  Bank  of  Augusta  v. 
Warthen— 349. 

Commonwealth  Bonding  etc.,  Ins. 
Co.  v.  Cator — 406,  442,  444,  466, 
467,  480. 

Commonwealth  Bonding,  etc.,  Ins. 
Co.  v.  Thurman — 85,  444. 

Commonwealth  S.  S.  Co.  v.  Ameri- 
can Shipbuilding  Co.— 16,  23,  160, 
277,  322,  336,  355,  510,  511. 

Compo   v.    Jackson    Iron   Co. — 294. 

Components  Tube  Co.  v.  Naylor — 
20,  383,  385,  386,  391,  401,  403, 
420,  429,  442,  447,  460,  461. 

Coucha   v.   Murrietta — 351. 

Cone  Export  &  Commission  Co.  v. 
Poole— 586. 

Conklin  v.  United  Const.  &  Supply 
Co.— 50. 

Connecticut  &  Passumpsic  Rivers  R. 
R.  Co.  v.  Bailey— 109,  480. 

Connell  v.  McWatters — 168,  554. 

Conner  v.  Abbott — 585. 

Constant  v.  University  of  Roches- 
ter—128. 

Continental  Ins.  Co.  v.  N.  Y.  &  H. 
R.  R.  Co.— 232,  346. 

Continental  Securities  Co.  v.  Bel- 
miont— 190,  231,  264,  265,  284,  309, 
338,  340,  342,  346,  347. 

Continental  Trust  Co.  v.  Toledo,  etc., 
R.  R.  Co.— 97. 

Converse  v.  Blumrich — 382,  459. 

Converse  v.  Hamilton — 336. 

Cook  v.  Southern  Columbia  Climber 
Co.— 176. 

Cook  v.  Sterling  Electric  Co.— 130. 

Cooke  v.  Tonkin— 560. 


Cooke  v.  Watson— 139. 
Coolidge  v.   Goddard — 414. 
Cooper  v.  Ford — 129. 
Cooper  v.  McKee — 571.   • 
Cooper  v.  Webb — 575. 
Cornell  v.  Corbin— 117. 
Cornell  v.  Hay— 20,  392,  406. 
Corning    v.    Barrett— 338,   339,   341, 

353,  354. 

Cornwall  Furniture  Co.,  Re — 314. 
Cortes  Co.  v.  Thannhauser — 17,  321,. 

361,  .387,  399,  401,  402,  433,  485> 

507,    527. 
Cory  v.  Lee— 583. 
Cottentin  v.  Meyer — 581. 
Cottle,   Ex  parte — 560. 
Cottrill  v.  Krum— 367,  370,  388,  397, 

400,  417,  419,  455,  459. 
Coulter  v.  Clark — 402,  415,  428,  462. 
Cowley  v.  Smyth— 376. 
Cox  v.  National  Coal  &  Oil  Invest- 
ment  Co.— 6,    294,    363,    441,   446, 

453,  455,  465,  470,  471. 
Coyote  G.   &  S.  M.  Co.  v.  Ruble— 

77,  136. 

Craig  v.  Phillips— 27,  223,  392,  395. 
Cranney  v.  McAllister — 174. 
Cranor    Co.    v.    Miller — See    A.    J. 

Cranor  Co.  v.  Miller. 
Cranston     v.     Bank     of     State    of 

Georgia — 311,  350. 
Crater  v.  Binninger — 496. 
Crawford  v.  Burke— 299. 
Crichfield   v.   Julia— 58,   64,   65,   68. 
Cridland    v.    De   Mauley— 398,   407, 

452. 

Crosby  Lumber  Co.  v.  Smith— 39. 
Croskey  v.  Bank  of  Wales— 80,  163, 

452. 
Cross   v.   Farmers  Elevator   Co.   of 

Dawson — 40. 


TABLE    OP   CASES. 


(The  references  are  to  the  pages.) 


Cross   v.    Pinckneyville   Mill    Co. — 

131. 

Cross  v.   Sackett— 363,  364,  415. 
Crossman  v.   Penrose  Ferry  Bridge 

Co. — 444. 

Crow  v.  Green— 538. 
Crow  River  Valley  Creamery  Co.  v. 

Strande— 130. 
Crowe  v.  Malba  Land  Co.— 13,  160, 

181. 

Crump  v.  U.  S.  Mining  Co. — 441. 
Cuba  Colony  Co.   v.   Kirby— 22,  24, 

151,   152,   158,  279,  309,  310,  312, 

373. 
Culberson  v.  Alabama  Const.  Co. — 

118. 

Cullen  v.  O'Meara — 140. 
Cullen    v.    Thompson's    Trustees — 

350. 
Cumberland  Coal  Co.  v.  Sherman — 

126,  205. 
Cumberland   Land   Co.   v.   Daniel — 

137. 

Cummings  v.  Brown — 130. 
Cummings  v.  Harsabrauch — 128. 
Cunningham  v.  Edgefield  &  Ky.  R. 

R.  Co.— 382,  412. 
Curran  v.  Oppenheimer — 178. 
Curran  v.  Smith— 68,  70. 
Curtis,  Jones  &  Co.  v.  Smelter  Natl. 

Bank— 118. 
Cushion  Heel  Shoe  Co.  v.  Hartt — 

19,  20,  74,  76,  80,  89,  93,  95,  98, 

111,  113,  118,   155,   156,   157. 
Custar  v.  Titusville  G.  &  W.  Co.— 

409,  444,  479. 

D. 

Dale  &  Plant,  Ltd.,  Re— 80,  83,  96. 

Daly  v.  Wise— 378. 

Dansk     Rekylriffel    >Syndikat     Ak- 


tieselskab  v.  Snell — 117. 
Darby,    In    re— 152,    160,    201,    220, 

233,  266. 

Darling   v.    Stuart— 378. 
Darragh  v.  Wetter  Mfg.  Co. — 341. 
Dartmouth  College  v.  Woodward — 

137. 

Dassler  v.  Rowe — 166,  468. 
Davenport  v.  Dows — 352. 
Davidson    v.    Hobson — 416,   581. 
Davidson  v.  Tulloch— 363,  473,  497, 

499. 

Davis  v.  Central  Land  Co. — 377. 
Davis   v.    Las    Ovas   Co. — 159,    211, 

239,  245,  277,  310,  349,  535. 
Davis  v.  Ravenna   Creamery  Co. — 

113. 

Davis  v.  Shafer — 71. 
Davis  v.    Stuard— 383. 
Davis  v.  Trent — 377. 
Davis  v.  Valley  Electric  Light  Co. — 

98. 
Davis  Bros.  v.  Montgomery  F.  &  C. 

Co.— 80. 
Davis  &  Co.   v.   Dumont — 441,  442, 

479. 
Davis  Improved  Wrought  Iron  W. 

W.  Co.  v.  Davis  Wrought  Iron  W. 

Co.— 117,  125,  128. 
Davis  &   Rankin  v.   Dexter   Butter 

&  Cheese  Co.— 89,  116. 
Davis  &  Rankin  v.  Maysville  Cream- 
ery Ass'n — 71,  72,  75. 
Davis  &  Rankin  Bldg.  &  Mfg.  Co. 

v.  Barber — 71. 
Davis  &  Rankin  Bldg.   &  Mfg.  Co. 

v.  Colusa  Dairy  Ass'n — 72,  126. 
Davis  &  Rankin   Bldg.   &  Mfg.  Co. 

v.    Hillsboro   Creamery   Co. — 112. 
Davis  &  Rankin  Bldg.  &  Mfg.  Co. 

v.  Jones — 71. 


xxvi 


TABLE    OF   CASES. 
(The  references  are  to  the  pages.) 


Davis  &  Rankin  Bldg.  &  Mfg.  Co. 
v.  Vice— 126. 

Davison  v.    Seymour — 514. 

Dawson   v.    Morrison — 561. 

Day  v.  National  Mutual  Bldg.  & 
Loan  Ass'n — 358. 

Dayton  Watervliet  Valley  &  Xenia 
Turnpike  Co.  v.  Coy— 75,  85,  132. 

De  Giverville  Land  Co.  v.  Thompson 
—86. 

Deitz  v.   Stephenson — 60. 

De  Klotz  v.  Broussard— 388,  428, 
506,  520. 

De  La  Motte  v.  Northwestern  Clear- 
ance Co.— 162,  163,  527. 

Delano  v.  Rice — 460. 

De  Lery  v.  Rogers — 148. 

Dengler  v.  Helms— 119,  141,  143, 
146. 

Dennin  v.   Wood — 352. 

Dennis   v.   Jones — 472. 

Dennison  v.   Keasbey — 58,  59. 

Densmore  Oil  Co.  v.  Densmore — 10, 
12,  20,  26,  172,  173,  181,  188,  222, 
224,  305,  306,  307. 

Denton  v.  Macneil— 144,  421,  564, 
574,  575. 

Denton  v.  Ontario  Co.  Natl.  Bank 
—128. 

Denver  &  Sante  Fe  Ry.  Co.  v.  Han- 
negan — 118. 

Deposit  Life  Assurance  Co.  v.  Ays- 
cough — 451. 

Derry  v.  Peek— 178,  203,  362,  369, 
370,  371,  373,  374,  375,  376,  377, 
379,  380,  381,  382,  420,  423,  424, 
457,  468,  497,  498,  499,  500. 

De  Ruvigne's  Case— 178,  312,  488. 

Devala  Provident  Gold  Min.  Co.,  In 
re — 442. 

Dexter  v.   McClellan — 514. 

Dickennan  v.  Northern  Trust  Co. — 


4,  5,  16,  17,  18,  151,  157,  161,  172, 
181,  219,  318,  319,  326,  347,  387, 
434. 

Dickerson  v.  Appleton — 39,  63. 

Dickinson  v.  Matheson  Motor  Car 
Co.— 39,  64. 

Dickson  v.  Kittson— 37. 

Diel  v.   Kellogg— 462. 

Dimpfel  v.  Ohio  &  Miss.  Ry.  Co. — 
338,  341. 

Dingeldein  v.  Third  Ave*  R.  R.  Co. — 
113. 

Directors,  etc.,  of  Central  Ry.  Co.  of 
Venezuela  v.  Kisch— 384,  385,  387, 
388,  397,  398,  420,  421,  441,  447, 
460,  461,  470,  471,  478. 

Disderi  &  Co.,  In  re— 178. 

Distilled  Spirits,  The— 128. 

Dixon's  Case — 460. 

Dobbins  v.  Peabody— 532. 

Dodge  v.  Woolsey — 347. 

Dodgson's   Case — 442,   444. 

Dole  v.  Wooldredge — 440,  451,  452, 
536. 

Dominion  Cotton  Mills  Co.,  Ltd.,  v. 
Amyot— 232. 

Donaldson  Bond  &  Stock  Co.  v. 
Houck — 141. 

Donnelly  v.  Baltimore  Trust  &  Guar- 
antee Co.— 20,  376. 

Donner  v.  Donner — 50. 

Donovan  v.  Purtell — 118. 

Doo  v.  London  &  Croydon  Ry.  Co. 
—103. 

Doran  v.  Eaton — 417,  457,  496. 

Dorris  v.  French— 171,  181,  185,  447. 

Dorris  v.  Sweeney — 88. 

Dotson  v.  Savannah  Pure  Food  Can- 
ning Co. — 132. 

Doty   v.   Patterson — 584. 

Doubleday  v.  Muskett — 561. 

Douglas  Printing  Co.  v.  Over — 119. 


TABLE    OF    CASES. 


xxvii 


(The  references  are  to  the  pages.) 


Downes  v.  Ship— 460,  466,  474,  571. 
Downey  v.  Finucane— 191,  223,  362, 

368,  369,   379,  381,  388,  398,  407, 

419,  420,  427,  428,  538. 
Doyle  v.  Mizner — 582. 
Dresser  v.  Mercantile  Trust  Co. — 

365. 

Dresser  v.  Norwood — 128. 
Drew  v.  Beall — 495. 
Drincqbier  v.   Wood— 363,  370,  375, 

452. 

Drouet  v.  Taylor — 573. 
Drucklieb   v.    Sam   H.   Harris — 38. 
Drum  State  Quarry  Co.,  In  re — 179. 
Drummond  v.   Crane — 148. 
Dubuque  Female  College  v.  District 

Townships  of  Dubuque — 81,  89. 
Duffield  v.   E.   T.   Barnum   Wire  & 

Iron  Works— 382,  472,  478. 
Duffus  v.  Howard  Furnace  Co. — 317. 
Duffy  v.  McKenna — i97. 
Duke  v.  Dive— 569. 
Duke  v.  Forbes— 569. 
Duke  v.  Taylor— 583. 
Duncan,  In  re — 352. 
Dundee  Suburban  Ry.— 165, 166,  553. 
Dunlap  v.  Twin  City  Power  Co. — 

159,   310,   506. 
Dunlop-Truffault  C.  &  T.  Mfg.  Co., 

Ltd.,    In   re— 404,   466. 
Dunn  v.  Candee — 474. 
Dunne  v.   English— 201,  214,  221. 
Dunnett  v.  Mitchell— 348,  458. 
Dunning  v.  Bates — 558. 
Dupignac  v.  Bernstrom — 98. 
Du  Pont  v.  Tilden— 524. 
Du   Puy   v.   Transportation  &  Ter- 
minal Co.— 347,  397,  404,  421. 
Duranty's   Case — 442,   444. 
Durgin  v.   Smith— 140. 
Durlacher  v.  Frazer — 119. 
Duryea  v.  Zimmerman — 371,  377. 


Duvergier  v.  Fellows— 33,  502. 
Du  Vivier  &  Co.  v.  Gallice— 118. 
Dyckman  v.  Valiente — 580. 
Dyer  v.  Rich— 68,  137,  138. 
Dynes  v.  Shaffer — 409,  472. 

E. 

Eaglesfield   v.   Marquis  of  London- 
derry—374,  398. 
Eakins  v.  Amer.  White  Bronze  Co. 

—13,  551,  553,  563. 
Earl     of    Lindsey,     The    v.     Great 

Northern  Ry.  Co.— 103. 
Earl  of  Shrewsbury  v.  North  Staf- 
fordshire Ry.  Co.— 104,  105,  121. 
East  Tennessee  Land  Co.  v.  Leeson 

—312,  337,  487. 
Eastern  Counties  Ry.  Co.  v.  Hawkes 

—3,  103. 

Eastman  v.  Blackledge — 168. 
Easton  Nat'l  Bk.  v.  American  Brick 

&   Tile   Co.— 23. 
Eastwick's  Case — 179. 
Eaton  v.  Walker — 583,  584. 
Eaton,    Cole    &    Burnham    Co.    v. 

A  very— 363,   366. 
Ebling  v.  Nekarda — 516. 
Economy  Powder  Co.  v.  Boyer — 369, 

433,  487. 
Eddystone  Marine  Ins.  Co.,  In  re — 

158,  164. 
Eden  v.  Ridsdales  Railway  Lamp  & 

Lighting  Co.— 178,  310,  312,  487. 
Edenborn  v.  Sim — 445,  448,  535. 
Edgar  v.  Sloan — See  In  re  Hess  Mfg. 

Co. 

Edger   v.    Knapp — 144. 
Edgerton  v.  Electric  Imp.,  etc.,  Co. 

—33. 
Edgington  v.  Fitzmaurice — 418. 


xxviii 


TABLE   OF   CASES. 


(The  references  are  to  the  pages.) 


Edinburgh  Northern  Tramways  Co. 

v.  Mann— 167,  578. 
Edwards,   Ex  parte — 404,  467,  468. 
Edwards  v.  Grand  Junction  Ry.  Co. 

—2,   103,   104. 

Edwards  v.  Johnston— 171,  200,  569. 
Ehrich  v.  Grant — 59. 
Eisenmayer  v.  Leonardt — 68. 
Eisleben  v.  Brooks — 68. 
El   Cajon   Portland   Cement   Co.    v. 

Wentz  Eng.  Co.— 119,  348. 
Eldred   v.   Bell   Telephone   Co. — 46. 
Electric  Fire  Proofing  Co.  v.  Smith 

—32. 

Electric  Welding  Co.  v.  Prince — 13. 
Eley  v.  Positive  Gov't  Sec.  Life  Ins. 

Co.— 80. 

Ellis  v.    Penn.   Beef  Co.— 344. 
Ellis  v.  Western  Nat.  Bk.— 113. 
Ellison  v.  Mobile  &  Ohio  R.  R.  Co. 

—461. 

Ely  v.  Hanford— 305. 
Emery    v.    Parrott— 176,    177,    311, 

328,  329,  350,  439,  485,  511,  516, 

528,  539. 
Emma  Silver  Mining  Co.  v.  Grant — 

7,   8,   17,   152,   153,   160,  172,  175, 

176,   180,  183,  186,  204,  221,   276, 

298,  485. 
Emma   Silver  Mining  Co.  v.   Lewis 

—4,  6,  9,  23,  26,  28,  328,  511. 
Empire  Mills  v.  Alston  Grocery  Co. 

—581,  582,  586. 
Empress   Engineering   Co.,   In   re — 

76,  80  82,  96,  98,  102. 
Endicott  v.  Marvel — 346. 
Englefield  Colliery  Co.,   In  re— 162, 

164,  178. 
English  &  Colonial  Produce  Co.  Ltd., 

In  re— 98,  152,  155,  156,  165. 
Ennis  Cotton  Oil  Co.  v.  Burks — 89, 

140,  142,  146. 
Ennis  v.  West  Clare  Ry.  Co.— 154. 


Eno  v.  Sanders — 39. 

Epp  v.  Hinton — 398. 

Erlanger  v.  New  Sombrero  Phos- 
phate Co.— 6,  7,  11,  17,  18,  20,  24, 
172,  185,  188,  190,  191,  193,  201, 
202,  203,  205,  206,  208,  209,  211, 
213,  218,  219,  220,  221,  223,  231, 
276,  277,  291,  292,  293,  294,  295, 
296,  305,  307,  319,  321,  326,  335, 
351,  352,  354,  355,  401,  406,  420, 
427,  433,  537,  538,  548;  550. 

Eskern  Slate  &  Slab  Quarries  Co., 
Ltd.,  Re— 177,  178. 

Esper  v.  Miller— 97,  143. 

Essex  Turnpike  Corporation  v.  Col- 
lins—133. 

Estates  Investment  Co.,  In  re — 476. 

Etna  Ins.  Co.,  Ltd.,  In  re — 475. 

Ettar  Realty  Co.  v.  Cohen — 434. 

Eureka  Min.  Smelting  &  Power  Co. 
v.  Lively— 233. 

Evans's  Appeal— 292,  296. 

Evans  v.  Borie— 292,  296. 

Evans  v.  Palmer — 377. 

Everett  v.  De  Fontaine — 63. 

Exchange  Bank  of  Kentucky  v. 
Gaitskill-^95. 

Ex-Line-Reimers  Co.  v.  Lone  Star 
Life  Ins.  Co.— 75,  81,  90. 

Ex-Mission  Land  &  Water  Co.  v. 
Flash-^,  5,  18,  41,  276,  293,  294, 
305,  308,  316,  317,  326,  327,  361, 
399,  534,  538. 

Exploring  Land  &  Minerals  Co., 
Ltd.,  v.  Kolckmann — 497. 

Exter  v.  Sawyer— 10,  171,  181,  187, 
189,  194,  211,  224,  225,  277,  302, 
336,  337,  338,  483,  506. 

F. 

Fairfield  Savings  Bank  v.  Chase — 
128. 


TABLE   OF   CASES. 


xxix 


(The  references  are  to  the  pages.) 


Falcke  v.  Scottish  Imp.  Inv.  Co.— 83. 
Fargo  G.  &  C.  Co.   v.   Fargo  G.  & 

E.  Co.— 398,  460,  495. 
Farjeon  v.  Indian  Territory  Illum- 
inating Co. — 554. 
Farmers  &  Citizens  Bank  v.  Payne 

—128. 
Farmers'     Bk.    of    Vine    Grove    v. 

Smith— 155,    160. 
Farmers'  Co-op.  Trust  Co.  v.  Floyd 

—140. 
Farmers'  Gin  &  Milling  Co.  v.  Jones 

—141. 
Farmers'    Mut.    Fire   Ins.    Ass'n    v. 

Burch— 150. 
"Farmers   State  Bk.   v.   Kuchs — 581, 

587. 
Farnsworth   v.    Muscatine   Prod.   & 

Pure  Ice  Co.— 382. 
Farrar  v.  Walker — 477,  478. 
Farris  v.  Wirt— 63,  291. 
Faure  Elec.  Accumulator  Co.,  In  re 

—153,  161,  164. 
Fay  v.  Noble — 586. 
Fear  v.  Bartlett— 370,  384,  398,  404, 

407,  409,  417,  442,  450,  461,  466, 

469,  474,  475,  477,  480. 
Federal  Life  Ins.  Co.  v.  Griffin — 204, 

211,  218,  228,  321,  322,  531,  532. 
Federal  Sanitary  Clearing  &  Refin- 
ing Co.  v.  Loeb— 131,  133. 
Feitel  v.  Dreyfous— 88. 
Felgate's  Case— 122,  384. 
Felix  Hadley  &  Co.,  Ltd.,  v.  Hadley 

—249. 

Fenn  v.  Curtis— 363,  455. 
Fennessy  v.  Ross — 37. 
Fentress  v.  Steele  &  Sons — 146. 
Ferrochem   Co.   of   Penna.    v.    Dan- 

ziger — 572. 
Fey  v.  Peoria  Watch  Co. — 411. 


Ffooks   v.   Southwestern   Ry.   Co. — 

284. 

Field  v.  Cooks— 581,  584. 
Field  v.  Pierce — 45. 
Finck  v.  Canadaway  Fertilizer  Co. 

—10,  322,  510. 
Findlater  v.  Borland — 414. 
Findlay  v.  Baltimore  Trust  &  Guar- 
antee Co.— 383,  388,  449. 
Fink  v.  Lamphere— 10,  322,  510. 
Finlay  v.  Chirney — 352. 
Finnegan  v.  Knights  of  Labor  Bldg. 

Ass'n— 584,  585. 
First  Ave.  Land  Co.  v.  Hildebrand 

—4,  6,  18,  172,  177,  313,  331,  488. 
First  Nat'l  Bank  v.  Armstrong — 76. 
First  Nat'l  Bk.   v.  Church  Federa- 
tion of  America— 120,  121. 
First  Nat'l  Bank   v.   Hurford — 442, 

479. 
First  Nat'l   Bank  v.   People's  Nat'l 

Bank— 376. 
Fisher  v.  Bush — 37. 
Fisher  v.  Mellen— 377. 
Fitzgerald  &  Mallory  Const.  Co.  v. 

Fitzgerald— 188. 
Fitzpatrick  v.  O'Neill— 158,  163,  164, 

208. 
Fitzroy  Bessemer  Steel  Co.,  Ltd.,  Re 

—179,  290,  312. 

Fitzwilliam  v.  Travis— 567,  573. 
Flagg  v.   Stowe — 580. 
Flagler   Engraving   Machine  Co.   v. 

Flagler— 235,  433. 
Flaherty  v.  Cary— 36,  64,  66,  531. 
Flaherty  v.  Murray — 168. 
Flanagan  v.  Lyon— 39,  47,  233,  535. 
Florida   Coca  Cola   Bottling  Co.   v. 

Ricker— 130,  139. 
Flower  v.   Brumbach — 425. 
Foley   v.   Holtry— 372,  378. 
Forbes  v.  Thorpe — 116. 


TABLE   OF   CASES. 


(The  references  are  to  the  pages.) 


Force  v.  Sawyer-Boss  Mfg.  Co. — 76. 

Ford  v.  French — 128. 

Forest  Land  Co.  v.  Bjorkquist — 10, 
350,  507,  509,  511,  512. 

Forrester  v.  Bell— 167,  537. 

Forrester  v.  Boston  &  M.  Con.  Cop- 
per, etc.,  Min.  Co.— 284,  338,  342. 

Fort  Wayne,  etc.,  Turnpike  Co.  v. 
Deam — 417. 

Foss  v.  Harbottle— 2,  26,  188,  189, 
198,  223,  225,  227,  337,  346. 

Foster  v.  Mansfield,  etc.,  R.  R.  Co. 
—293. 

Foster  v.  Seymour— 233,  234,  235, 
236,  257,  258,  430. 

Fottler  v.   Moseley — 416. 

Foulkes  v.  Quartz  Hill  Consol.  Gold 
Min.  Co.— 467. 

Foulks  Accelerating  Air  Motor  Co. 
v.  Thies — 382. 

Fountain  Spring  Park  Co.  v.  'Rob- 
erts—350,  361,  399,  401,  511,  539. 

Fourchy  v.   Ellis — 41. 

Fox's  Case— 476,  571. 

Fox  v.  Allensville  C.  S.  &  V.  Turn- 
pike Co.— 122,  443. 

Fox  v.  McComb — 583. 

Franey  v.  Warner — 41,  85,  86,  188, 
307,  308,  327,  338,  339,  355,  399, 
400,  429,  436,  440,  445,  448,  488- 
496,  534. 

Franey  v.  Wauwatosa  Park  Co. — 
469. 

Frank  v.  Bradley  Currier  Co. — 378. 

Frank  v.  Drenkhahn — 138. 

Frankenburg  v.  Great  Horseless 
Carriage  Co. — 453. 

Frankfort  &  S.  Turnpike  Co.  v. 
Churchill— 124. 

Franklin  Fire  Ins.  Co.  v.  Hart — 77. 

Franklin  Min.  Co.  v.  O'Brien— 117, 
125,  126. 


Fred  Macey  Co.  v.  Macey — 18,  19, 
183,  239,  253,  292,  294,  332,  388. 

Freeman  v.  Harbaugh  Co. — 379. 

Freeman  v.   Watts — 126. 

Freeman  Imp.  Co.   v.   Osborn — 165. 

Friedman   v.   Janssen — 538;  580. 

Fry   v.   Manhattan  Trust  Co. — 162. 

Fry  v.  Miles— 554,  563. 

Furniture  Carpet  Co.  v.  Crawford 
— See  Queen  City  Furniture  Car- 
pet Co.  v.  Crawford. 

G. 

Gabriel  v.  Graham — 418. 

Gaines  v.  McAllister — 164. 

Galena  &  Southern  Wisconsin  R.  R. 

Co.   v.   Ennor — 408. 
Gamble  v.  Queens  County  Water  Co. 

—232. 

Garnett  v.  Richardson — 581,  584. 
Garretson  v.  Pacific  Crude  Oil  Co. 

—208,  235,  246,  262,  266. 
Garrett  v.  Kansas  City,  etc.,  Co. — 

33,  34. 

Garrett  v.  Wannfried— 307,  399,  440. 
Garrett  Co.  v.  Appleton — 382. 
Garrett  Co.  v.  Astor— 378. 
Gartside  Coal  Co.  v.  Maxwell — 582.. 
Garvin   v.    Edmondson — 527. 
Garwood  v.  Ede — 568. 
Gas  Co.  v.  Elder— 130. 
Gay's  Case— -566. 
Gearhart  v.  Standard  Steel  Car  Co. 

—120. 
General  Exchange  Bank  v.  Homer 

—164,  553. 
General  Ins.  Co.,  The,  v.  The  U.  S. 

Ins.  Co. — 128. 
Geneva  Mineral  Spring  Co.  v.  Cour- 

sey— 582. 


TABLE    OF    CASES. 


xxxi 


(The  references  are  to  the  pages.) 


Gent  v.  Manuf.  &  Merchant's  Ins. 
Co.— 77,  78. 

Georgia  Co.  v.  Castleberry — 118. 

Gerdlng  v.  East  Tennessee  Land  Co. 
—348. 

Gere  v.  Dorr— 310,  311,  359. 

Gerhard  v.  Bates— 363,  415. 

Gerner  v.  Mosher— 365,  376,  378. 

Gerson  v.   Simpson — 550. 

Getchell  v.  Dusenbury — 462. 

Getty  v.  Devlin— 198,  227,  297,  305, 
307,  321,  322,  351,  353,  355,  368, 
399,  410,  428,  436,  440,  448,  450, 
451,  459,  472,  495,  538,  539. 

Getty  v.  Donelly — 428. 

Gibbens  v.  Bourland — 379. 

Gibbs  v.  Guild— 463. 

Gibson's  Case-^11,  412,  442,  473. 

Gilbert  v.  Bunnell— 60,  62. 

Gildersleeve  v.  Balfour — 581. 

Giles  v.  Comfoot — 560. 

Giles  v.  Smith— 142,  167,  168. 

Gilkeson  v.  Thompson— 128,  129. 

Gillett  v.  Dodge— 197,  529. 

Gilman  v.  Gross— 123,  125. 

Ginn  v.  Almy— 100,  449,  465,  495. 

Girard  v.  Case  Bros.  Cutlery  Co. — 
90,  91,  98,  121,  127,  128,  129. 

Given  v.  Powell — 379. 

Glasier  v.  Rolls— 10,  362,  373,  377, 
423,  428. 

Cleaves  v.  Brick  Church  Turnpike 
Co.— 87,  131. 

Glenn  v.  Bussy— 86,  131. 

Globe  Realty  Co.   v.   Whitney— 136. 

Gluckstein  v.  Barnes — 8,  17,  20,  22, 
23,  26,  27,  172,  175,  182,  186,  200, 
202,  203,  214,  218,  227,  247,  267, 
305,  308,  309,  320,  325,  349,  361, 
399,  420,  486,  539,  550. 

Goddard  v.  Hodges — 537. 


Godfrey  v.   Schneck— 368,  507,  508, 

510,  511. 
Gold  Co.,  In  re— 217,  233,  235,  236, 

284,  502. 
Goldmark  v.  Magnolia  Metal  Co. — 

119. 
Gold  Ridge  Min.  &  Dev.  Co.  v.  Rice 

—233. 

Goldsmid's  Case — 571. 
Gooday  v.  Colchester  &  Stour  Valley 

Ry.  Co.— 76,  103,  110. 
Goodrich  v.  Reynolds  Wilder  &  Co. 

—442. 
Goodwin  v.  Wilbur— 7,  18,  19,  290, 

388,  410,  500. 

Goodwin  Co.'s  Appeal — 60. 
Gordon  v.  House  of  Childhood  Inc. 

—81. 

Gorgier  v.  Morris — 168. 
Gough  Mill  &  Gin  Co.  v.  Looney — 

417. 

Gould  v.  United  States— 504. 
Gourlie  v.  Chandler— 86,  122,  125. 
Cover's  Case— 10,   23,   24,  188,  192, 

193,  223,  307,  386,   391,   392,  395, 

441. 

Gower   v.  Couldridge — 453. 
Graff  v.   Pittsburgh  &  Steubenville 

R.  R.  Co.— 123. 

Graham  v.  Machine  Works — 338. 
Grand     Rapids     Furniture     Co.     v. 

Grand  Hotel  &  Opera  House  Co. 

—113,  125,  127,  139. 
Grand  River  Bridge  Co.  v.  Rollins 

—89. 
Grand  Trunk,  etc.,  Ry.  Co.  v.  Brodie 

—577. 

Grant   v.   Gold   Exploration   &   De- 
velopment   Synd.— 513,    514,    515, 

516. 
Grant  v.  Walsh— 64. 


xxxii 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


Grape  Sugar  &  Vinegar  Mfg.  Co.  v. 

Small—  101. 
Gray  v.  Bloomington  &  Normal  Ry. 


Gray  v.  Bonnell—  536,  537. 

Gray  v.  Collins  —  415,  417. 

Gray  v.   Heinze—  331. 

Great  Luxembourg  Ry.  Co.  v.  Mag- 

nay—  321,  322. 
Great  Western  Ry.  Co.  v.  Rushout 

—338. 
Great    Western    Telegraph    Co.    v. 

Bush  —  466. 
Great    Western    Telegraph    Co.    v. 

Haight  —  408. 
Great  Wheal  Polgooth,  Ltd.,  In  re 

—11. 

Greaves  v.  Gouge—  338,  353. 
Green  v.  Barrett  —  567. 
Green  v.  Des  Garets  —  438. 
Green  v.  Gen'l  Prov.  Assurance  Co., 

Ltd.—  428. 
Greenberg  v.  Whitcomb  Lumber  Co. 

—140. 
Greenberg-Miller     Co.     v.     Everett 

Shoe  Co.—  118. 
Greenbrier  Industrial  Exposition  v. 

Rodes—  87,  88. 
Greenbrier  Industrial  Exposition  v. 

Squires—  571,  572. 
Greene    v.    Mercantile   Trust   Co.  — 

363,  364,  455. 
Greenhalgh   v.    Manchester   &    Bir- 

mingham Ry.  Co.—  103. 
Greenwood  v.  Leather  Shod  Wheel 

Co.—  219,  272,  392,  423,  424,  428. 
Greer  v.  Chartier's  Ry.  Co.  —  125. 
Gress  v.  Knight-^74,  478. 
Grier   v.   Hazard,   Hazard   &  Co.  — 

101. 
Griffin  v.  Beverley—  560. 


Griffith  v.  Blackwater  Boom  &  Lum- 
ber Co.— 205. 

Groel  v.  United  Electric  Co.  of  N. 
J.— 171,  247,  337,  345,  353. 

Grover  v.  Cavanaugh — 397,  415,  462. 

Guenther  v.  Amer.  Steel  Hoop  Co. — 
119. 

Gulf  &  Brazos  Valley  Ry.  Co.  v. 
Winder — 113. 

Gulliver    v.    Roelle — 152. 

Gunn  v.  London  &  Lancashire  Fire 
Ins.  Co.— 77,  80,  162. 

H. 

Hadcock  v.  Osmer — 378. 

Haines  v.  Franklin— 365,  403. 

Hale,  Ex  parte — 465. 

Hall's  Case— 561. 

Hall  v.  Baker  Furniture  Co. — 119. 

Hall    v.    Grayson    County    National 

Bank— 372,  401,  402,  411,  412,  440, 

447,  450,  460. 

Hall  v.  Herter  Bros.— 91,  93,  95,  113. 
Hall  v.  Old  Talargoch  Lead  Mining 

Co.— 474. 
Hall  v.  Selma  &  Tenn.  R.  R.  Co.— 

411,  480. 
Hall  v.  Vermont  &  Mass.  R.  R.  Co. 

—78,  155,  156,  159,  161. 
Hallows    v.    Fernie— 218,    369,    370, 

398,  405,  421,  422,  423,  424,  428, 

452,  461. 

Halsey  v.  Ackerman— 340,  348,  353. 
Halstead   v.    Grinnen— 293,    297. 
Hambleton  v.  Rhind— 388,  414,  514, 

516. 
Hamilton  v.  American  Hulled  Bean 

Co.— 408,  452,  453,  470. 
Hamilton  v.  Granger's  Life  &  Health 

Ins.   Co.— 477. 
Hamilton  v.  Smith— 537,  560. 


TABLE    OF    CASES. 


(The  references  are  to  the  pages.) 


Hamilton,   etc.,   Plank  Road  Co.   v. 

Rice— S6. 

Hamlin  v.  Abell— 379. 
Haminatt   v.   Emerson — 376. 
Hammond  v.  Pennock — 382. 
Hampton  v.   Buchanan — 36,  120. 
Hardee  v.  Sunset  Oil  Co. — 44. 
Hare's  Case — 475. 
Harrill  v.  Davis— 145,  581,  583,  584, 

586. 
Harrington     v.     Victoria     Graving 

Dock  Co. — 514. 
Harrison    v.     Vermont     Manganese 

Co.— 77. 

Hart  v.  Bank— 128. 
Hart  v.  Ogdensburg  &  L.  C.  R.  R. 

Co.— 346. 

Harvey  v.  Collett^45,  567,  575. 
Harvey  v.  Sellers — 62. 
Harvey  v.  Weitzenkorn — 123,  409. 
Haskell  v.  Sells— 87,  131,  408,  572. 
Haskell    v.    Worthington-^12,    460, 

477,  572. 

Haskins  v.  Ryan — 64,  531. 
Hastings  Lumber  Co.  v.  Edwards — 

411. 

Hause  v.  Mannheimer — 87. 
Hawes   v.    Oakland— 338,   340,   341, 

342,  343,  344,  345,  346. 
Hawkes  v.  Eastern  Counties  Ry.  Co. 

—103. 
Hawkeye  Gold  Dredging  Co.,  v.  State 

Bank  of  Iowa  Falls — 80,  97. 
Hawkins  v.  Mansfield  Gold  Mining 

Co.— 74. 

Hay's  Case— 172,  175,  178,  179. 
Hayden  v.  Green— 8,  219,  326,  482. 
Hayes    v.    Stirling— 570,    571,    573, 

574. 
Hayward   v.    Leeson — 20,    151,    160, 

161,   171,  176,   185,   187,  208,  213, 

246,  286,  306,  310,  312,  326,  328, 


329,  336,  337,  353,  415,  426,  485, 

487. 

Hayward  v.  National  Bank — 294. 
Hearther  v.  Southern  Power  &  Mill- 
ing Co.— 162,  168. 
Heath  v.  Erie  Ry.  Co.— 338,  347. 
Heaton  v.  A.  D.  Clark  &  Co. — 114. 
Hebberd    v.    Southwestern    Land    & 

Cattle  Co.— 283. 
Hebgen    v.    Koeffler— 307,    308,   319, 

327,   336,  337,  353,  355,  400,  429, 

440,  496. 

Hecht  v.  Acme  Coal  Co.— 137. 
Heckman's  Estate — 145,   512. 
Heckscher  v.  Edenborn — 17,  19,  190, 

201,  219,  228,  271,  302,  306,  355, 

402,  442,  445,  447,  448,  450,  527. 
Hecla  Consolidated  Gold  Mining  Co. 

v.  O'Neill— 100,  136. 
Hedin  v.  Minneapolis  M.  &  S.  Inst. 

—378. 
Henderson  v.  Lacon— 385,  406,  441, 

446,  475. 
Henderson   v.   Royal   British   Bk. — 

474. 

Hennequin   v.   Clews — 299. 
Hennessey  v.  Griggs — 54,  58. 
Henry  v.  North  American  Ry.  Const. 

Co.— 490. 
Henry  Gold  Min.  Co.  v.  Henry— 126, 

130. 

Hepner  v.  Maybury — 143. 
Hequembourg   v.   Edwards — 331. 
Herbert  v.  Duryea — 163. 
Herbert  v.  Uhl— 163. 
Hereford   &   So.   Wales   Waggon   & 

Engineering    Co.,    In    re — 76,    80, 

140,  155,  156,  160,  165,  176. 
Herman  v.  Foster  &  Reynolds  Co. — 

376. 

Herman  v.  Hall — 379. 
Hernreich  v.  Lidberg — 57. 


xxxiv 


TABLE    OF    CASES. 


(The  references  are  to  the  pages.) 


Hersey  v.  Tully— 140. 

Hersey  v.  Veazie — 353. 

Hess  v.  Draffen  &  Co.— 397,  399,  400, 

436. 
Hess  Mfg.  Co.,   In  re— 24,  26,   181, 

188,  191,   192,  209,  223,   302,  303, 

305,  306,  313,  319,  322,  323,  324, 

328,  489. 
Heymann  v.  European  Central  Ry. 

Co. — 406,  470. 
Hichens  v.  Congreve— 3,  23,  28,  177, 

186,  307,  308,  337,  400,  434. 
Hickies  v.  Philes— 63. 
Higgins  v.  California  P.  &  A.  Co.— 

117,  118. 

Higgins  v.  Grouse — 463,  470,  471. 
Higgins  v.  Hopkins— 142,  169,  563. 
Higgins  v.  Lansingh — 234,  235. 
High  v.  Berret — 497,  499. 
Hight,  Ex  parte— 561. 
Highway  Adv.  Co.  v.  Ellis — 26,  188, 

196,  222,  305. 

Hill  v.  Glasgow  R.  R.  Co.— 341. 
Hill  v.  Gould— 78. 
Hill  v.  Lane — 437,  445. 
Hills  v.  McMunn— 60. 
Hillside  Cemetery  Ass'n  v.  Holmes 

—135. 

Hinckley  v.  Pfister— 282,  284. 
Hindman    v.    First   Nat'l    Bk.— 364, 

365,  369,  370,  376,  380,  382,  437, 

445,  450,  455,  496,  498,  499. 
Hinkley  v.  Sac  Oil  &  Pipe  Line  Co. 

—6,    18,    21,    152,    158,    172,    173, 

175,    181,   194,  214,  246,  252,  273, 

293,  402,  428,  441,  447,  455,  470, 

477,  478,  479. 
Hirsche  v.  Sims — 312. 
Hirschel,  Ex  parte — 565. 
Hirschmann  v.  Iron  Range  &  H.  B. 
R.  R.  Co.— 79. 


Hitchcock  v.  Hustace— 17,  28,  160, 
239,  388. 

Hitchins  v.  Kilkenny,  etc.,  Ry.  Co. — 
79,  156. 

Hix  v.  Edison  Electric  Co. — 47,  514. 

Hladovec  v.  Paul — 40. 

Hoag  v.   Lamont — 90. 

Hodgens  v.  Jennings — 382. 

Hodges  v.  New  England  Screw  Co. 
—354. 

Hoffman  Steam  Coal  Co.V  Cumber- 
land Coal  &  Iron  Co. — 126. 

Hogg  v.  McGuffin — 60,  61. 

Holcomb  v.  Noble— 376. 

Holcombe  v.  Trenton  White  City  Co. 
—157,  163. 

Holdom  v.  Ayer — 376. 

Holdridge  v.  Webb — 417. 

Holland  v.  Cruft— 139. 

Holland  v.   Lee— 145. 

Hollander  v.   Heaslip — 475. 

Holloway  &  McRaney  Co.  v.  Brame 
—126. 

Holman  v.  Thomas — 33. 

Holmes  v.  Higgins — 537. 

Holmes  v.  Rivers — 459. 

Holmes  Refining  Co.  v.  United  Re- 
finers' Export  Oil  Co. — 582. 

Holt's  Case — 442. 

Holyoke  Envelope  Co.  v.  U.  S.  En- 
velope Co.— 75,  82,  85. 

Home  Fire  Ins.  Co.  v.  Barber — 284, 
342. 

Home  Trust  Co.  v.  Bauchens — 222. 

Homer  v.  Barr  Pumping  Engine  Co. 
—337. 

Homestead  St.  Ry.  Co.  v.  Pittsburgh 
&  Homestead  Elec.  St.  Ry.  Co. — 
137. 

Honsucle  v.  Ruffin — 406,  460,  495, 
499. 

Hood  v.  Eden — 234. 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


Hoole  v.  Speak— 363,  377,  390. 
Hooper    v.    Central    Trust    Co. — 13, 

523,  538. 

Hopcraft  v.  Parker — 140. 
Hopkinson's  Case — 566. 
Hopper  v.  Hoctor — 580. 
Hord  v.  Realty  Investment  Corpora- 
tion— 346. 

Horn  v.   United   States— 504. 
Hornaday  v.   Ind.  &  111.  Cent.  Ry. 

Co.— 384. 
Hornblower    v.    Crandall— 369,    370, 

380,  460,  537,  538. 
Home  v.  Walton — 495. 
Horowitz  v.   Broads  Mfg.  Co. — 114. 
Horseshoe  Pier,  etc.,  Co.  v.   Sibley 

—131. 

Houghton  v.  Butler— 351,  352. 
Houldsworth    v.    City    of    Glasgow 

Bank— 368,  437,  474. 
Houseman   v.   Girard  Mutual   Bldg. 

&  Loan  Ass'n— 128,  129. 
Houston  v.  Thornton — 380. 
Hovey  v.  Blanchard — 128. 
Howard  v.  Glenn — 473. 
Howard  v.  Long — 583. 
Howard   v.   Patent   Ivory  Mfg.   Co. 

—82,  83,  89,  93,  98,  102. 
Howard,   Rec.   v.  Turner — 472,  474. 
Howard  Stove  Mfg.  Co.  v.  Dingman 

—538. 
Howatson  Patent  Furnace  Co.,  Re — 

179,  489,  490. 

Howden    (Lord)    v.    Simpson — 106. 
Howe  v.  Raymond — 569. 
Howerton  v.  Augustine — 459. 
Howison  v.  Baird — 62. 
Hoyer  v.  Ludington— 368,  519. 
Hoyt  v.  Latham— 295. 
Hub  Publishing  Co.  v.  Richardson 

—140. 


Hubbard  v.  Internat'l  Merc.  Agency 
—413. 

Hubbard   v.   Oliver — 462. 

Hubbard  v.  Weare— 377,  378,  381, 
382. 

Hubbell  v.  Meigs — 495,  499. 

Hubert  Oil  Co.,  In  re— See  (McEl- 
henny's  Appeal.) 

Hudson   v.   West— 567,   570,  574. 

Hudson  Milling  Co.  v.  Higgins — 75. 

Hudson  Real  Estate  Co.  v.  Tower — 
86,  87. 

Hughes  v.  Antietam  Mfg.  Co. — 417. 

Hughes  v.  Cadena  De  Cobre  Min- 
ing Co.— 19,  157,  172,  176,  201, 
209,  211,  265,  273,  283,  284,  336. 

Huiskamp  v.  West— 39. 

Hull,  Barnsley  &  West  Riding  Junc- 
tion Ry.,  In  re — 579. 

Hume  v.  Record  Reign  Jubilee 
Synd.— 165. 

Humphreys  v.  Drew — 585. 

Humphreys  v.  Mooney — 583. 

Hung  Man  v.   Ellis— 143,  537. 

Hunnewell  v.  Duxbury — 365. 

Hunt  v.  Davis— 63. 

Hunter  v.  French  League  Safety 
Cure  Co.— 366,  382,  399,  414,  465. 

Hunter  Smokeless  Powder  Co.  v. 
Hunter— 33,  51. 

Huntress  v.  Blodgett— 379,  462. 

Huron  Printing  &  Bindery  Co.  v. 
Kittleson— 93,  98,  125,  127. 

Hurt  v.  Miller-^73. 

Hurt  v.  Salisbury— 140,  585. 

Huster  v.  Newkirk  Creamery  &  Ice 
Co.— 123,  570. 

Hutchinson  v.  Simpson — 6,  16,  28, 
194,  212,  215,  216,  233,  234,  237, 
239,  247,  255,  312,  345,  346,  350, 
351,  352,  354,  430,  432,  433. 

Hutchinson    v.    Young — 376. 


xxxvi 


TABLE    OF    CASES. 


(The  references  are  to  the  pages.) 


Hutchison  v.  Surrey  Consumers  Gas 

Light  &  Coke  Ass'n — 77. 
Hutton  v.  Thompson — 565,  567,  568. 
Hutton  v.  Upfill— 562. 
Hyde  Park  Terrace  Co.  v.  Jackson 

Bros.    Realty   Co.— 279,   316,    317, 

493. 
Hyer   v.   Richmond   Traction   Co. — 

60. 
Hyslop  v.  Morel  Bros.,  etc.,  Ltd. — 

444. 


Ijams  v.  Andrews — 562. 

Imperial  Land  Co.  of  Marseilles,  In 

re— 517. 
Imperial    Mercantile    Credit    Ass'n 

v.    Coleman — See    Liquidators    of 

The  Imp.  Mercantile  Credit  Ass'n. 

v.  Coleman. 
Inland  Nursery  &  Floral  Co.  v.  Rice 

—233,  430. 

Innes  &  Co.,  In  re— 208,  489. 
Insurance  Bank  v.  Bank  of  U.  S. — 

110. 
Insurance   Press   v.    Montauk,    etc., 

Wire  Co.— 233,  234,  254,  255,  303, 

321,  346,  359,  432. 
Iowa  Drug  Co.  v.  Souers — 29. 
Ireland  v.  Globe  Milling  &  Reduc- 
tion Co.— 77,  78,  81,  94,  95. 
Irvine   v.   New   York   Edison   Co. — 

119. 


Jackson's  Case — 571. 
Jackson  v.  Hooper — 40. 
Jackson  v.  McChesney — 317. 
Jackson  v.  McLean's,  Executors  of 
—33,  37. 


Jackson  v.  Turquand — 383. 
Jacobson   v.   McCullough — 567,   568, 

580. 
James     Young     &     Sons,     Ltd.     v. 

Gowans — 84,  96. 

Jarrett  v.  Kennedy — 567,  570,  574. 
Jeanette   Bottle  Works  v.   Schall — 

87,  131,  409. 
Jefts  v.   York — 141. 
Jenkins    v.    Bradley— 134,    191,   264, 

313,    354,    488,   490,    4*94. 
Jennings    v.    Broughton — 268,    369, 

384,   421,   462. 
Jessop  v.  Ivory — 125. 
Jessup  v.  Carnegie — 585. 
Jesup   v.   Illinois   Central   R.   Co. — 

294. 

Jewell  v.  Mclntyre — 572. 
Jewell   v.   Rock  River   Paper  Co. — 

408,   412,   479. 
Jewett  v.  Palmer — 317. 
J.  H.  Lane  &  Co.  v.  United  Oil  Cloth 

Co.— 116,  146. 
Job   v.   Lamb — 140. 
Johannesburg    Hotel    Co.,    In    re — 

96. 

Johannesburg  Hotel  Co.,  Re — 404. 
Johns  v.  Brown — 582. 
Johns  v.  Coffee— 388,  413,  416,  450, 

477. 

Johns  v.  McLester — 338. 
Johnson  v.  Brooks — 61. 
Johnson  v.  Gate — 378. 
Johnson  v.  Corser — 581,  585,  587. 
Johnson  v.  Goslett — 567. 
Johnson  v.  Gulick— 376,  378. 
Johnson  v.  Okerstrom — 583,  584. 
Johnson  v.   Sheridan  Lumber  Co. — 

17,  18,  177,  308,  317,  320,  353,  354. 
Johnston  v.  Ewing  Female  Univer- 
sity—131. 
Johnston  v.  Gumbel — 116. 


TABLE  OF  CASES. 


xxxvii 


(The  references  are  to  the  pages.) 


Johnston  v.  Standard  Mining  Co. — 

292,  294. 

Jones  v-  Allert — 97. 
Jones  v.  Aspen  Hardware  Co. — 138, 

583,  584. 

Jones  v.  Dodge — 88,  416. 
Jones  v.  Gould — 41,  167. 
Jones  v.  Harrison — 568. 
Jones    v.    Smith— 82,    91,    98,    107, 

110,  127,  147,  152,  155,  156. 
Jones  v.  Tunis — 61. 
Jordan    v.    Annex    Corporation — 18, 

19,  22,  172,  318,  320,  321,  323,  327, 

441,  450,  474. 
Joslin  v.  Stokes — 39. 
Jos.  Rosenheim  Shoe  Co.  v.  Home — 

See  Rosenheim  Shoe  Co.  v.  Home. 
Joy  v.  Manion— 85,  122,  480. 
Jury  v.   Stoker— 363,  392,  406,  460, 

500. 
Just  v.  Idaho  Canal  &  Imp.  Co. — 

342,  344. 
Jutte  v.  Hutchinson — 292. 

K. 

Kaeppler  v.  Redfield  Creamery  Co. 

—81,  98. 
Kaiser  v.  Lawrence   Savings   Bank 

—581,  582,  584,  585. 
Kantzler  v.   Bensinger — 38. 
Karberg's  Case— 268,  382,  404,  441, 

470,  472,  475. 

Katama  Land  Co.  v.  Holley — 87. 
Keelyn  v.  Strieder— 294,  473. 
Keith  v.  Radway — 17,  556. 
Kelly  v.  Ruble— 130,  136. 
Kelner  v.  Baxter — 82,  146. 
Kelsey  v.  Northern  Light  Oil  Co. — 

384,  422,  444,  572. 
Kempson  v.  Saunders — 444,  574. 


Kennebec  &  Portland  R.  R.  Co.  v. 

Palmer— 86,  131. 
Kennebec  &  Portland  R.  R.  Co.  v. 

Waters — 479,  480. 
Kennedy  v.  Bender — 469. 
Kennedy  v.  Fulton  Mercantile  Co. — 

140,  143. 
Kennedy  v.  Panama,  etc.,  Mail  Co. 

—383,  572. 

Kennedy  Drug  Co.  v.  Keyes — 311. 
Kensington  Station  Act.,  In  re — 11, 

579. 
Kent  v.  Freehold  Land  &  Brickmak- 

ing  Co.— 227,  399,   447,  474,  475. 
Kent  v.  Quick  Silver  Mining  Co. — 

284. 
Kent    Tramways   Co.,    In    re — 165, 

166. 

Kerridge  v.  Hesse — 142. 
Kiefhaber  Lumber  Co.   v.  Newport 

Lumber  Co. — 125. 

Kilgore  v.  Bruce — 413,  486,  495,  496. 
Kimber  v.  Young— 376,  415. 
Kimmerle  v.  Dowagiac  Gas  Co. — 89. 
Kincaid's  Case — 466. 
Kincaid  v.  Overshiner — 124,  413. 
King  v.  Barnes— 32,  39,  63. 
King  v.  Howeth  &  Co.— 86. 
Kingman  v.  Rome,  Watertown  &  Og- 

densburg  R.  R.  Co.— 344. 
Kinkier   v.   Junica — 380. 
Kirkpatrick  v.  Reeves — 379. 
Kirschmann  v.  Lediard — 64,  66,  67. 
Kisch  v.   Central  Ry.   Co.  of  Ven- 
ezuela— 421,  460,  461. 
Kline  Bros  &  Co.  v.  Royal  Ins.  Co. 

—80,  134. 

Knappen  v.  Freeman — 379. 
Knoop  v.   Bohmrich— 283,  315,  338, 

339. 
Knox   v.   Childersburg  Land   Co. — 

34,  85,  571. 


xxxviii 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


Knox  v.  Hayman— 362,  370,  377,  398. 
Koehler  v.  Black  River  Falls  Iron 

Co.— 347. 

Kohl  v.  Taylor-^00. 
Kohler   v.   Agassiz — 131. 
Koppel  v.  Mass.  Brick  Co.— 82,  112. 
Koster   v.    Pain— 12,   174,   177,    178, 

180,  514. 

Kountze  v.  Kennedy— 376,  378,  379. 
Krohn   v.   Lambeth — 144. 
Krohn    v.    Williamson— 33,    58,    59, 

62,    282,   312,    315,   338,   346,    438, 

464,  470,  527,  528. 
Krouse  v.  Woodward — 59. 
Krumm  v.  Beach — 495. 
Kuntz  v.  Tonnele — 514,  516. 

L. 

Lady  Forrest   Gold  Mine,   Ltd.,   In 

re— 223,  305. 
Ladywell  Mining  Co.  v.  Brookes — 3, 

24,  25,  26,  193,  219,  305,  306,  319, 

321,  322,  323,  324. 
Lagunas    Nitrate    Co.    v.    Lagunas 

Syndicate— 8,   13,  19,  21,  29,  189, 

190,  191,  200,   206,   208,   209,   214, 

221,   223,   230,   247,   284,   293,   294, 

295,  297,  322,  327,  344,  388,  398, 

434,  486. 

Lake  v.  Argyll— 562. 
Lake  v.  Ocean  City,  etc.,  Co. — 137. 
Lake  Ontario,  Auburn  &  N.  Y.  R.  R. 

Co.  v.  Mason— 86,  131. 
Lake   Ontario    Shore  R.   R.   Co.    v. 

Curtiss— 88,  124,  132. 
Lambert  v.  Elmendorf — 382. 
Lamberton  v.  Dunham — 376. 
Lamkin  v.  Baldwin  &  Lamkin  Mfg. 

Co.— 116. 
Lamphere  v.  Lang — 163. 


Lancaster  G.  &  C.  Co.  v.  Murray  G. 

S.   Co.— 81,   98,   102. 
Land  Credit  Co.  of  Ireland,  The — 

404. 
Land  Log  &  Lumber  Co.  v.  Mdntyre 

—354. 
Land  Title  &  Trust  Co.  v.  Asphalt 

Co.   of  Am. — 348. 
Landman     v.     Entwistle — 142,    563, 

567. 
Lands  Allotment  Co.  v.  Rroad — 512, 

514,  516. 

Lane  v.  DeBode— 129. 
Lane  v.  Fenn — 352,  369. 
Langdon  v.  Fogg — 233,  235,  236,  284, 

338,  344,  431,  541. 
Langham  v.  East  Wheal  Rose  Con- 
sol.  Silver  Lead  Mining  Co.,  Ltd. — 

461. 

Lantry  v.  Wallace — 477. 
Larking,    Ex    parte — See    Imperial 

Land  Co.  of  Marseilles. 
Larocque  v.  Beauchemin — 209. 
Las   Ovas   Co.    v.    Davis — 159,   211, 

310,  349. 
Lauder    v.    Peoria    Agricultural    & 

Trotting  Soc. — 84. 
Law  v.  Grant— -368,  509. 
Lawrence's  Case— 218,  371,  466,  470, 

571. 
Lawrence     v.     Nyberg     Automobile 

Works — 119. 

Lawrence  v.   Smith — 571. 
Learning  v.   Wise — 472,  473. 
Lebanon   Steam   Laundry   v.   Dyck- 

man — 434,  452. 
Lee  v.  K.  W.  Steinhart  Lumber  Co. 

—116. 

Leeds   v.   Townsend — 33. 
Leeds    &   Hanley   Theatres   of   Va- 
rieties, In  re— 13,  19,  20,  22,  24, 

25,    152,    160,    203,   213,   219,   221, 


TABLE    OF    CASES. 


XXXIX 


(The  references  are  to  the  pages.) 


247,   267,  305,  306,  308,  321,  324, 

326,   330,  362,   400,  403,  482,  492. 
Leffingwell    v.    Elliott—  139. 
Lefroy  v.  Gore  —  564,  565. 
Le  Grand  v.  Manhattan  Mercantile 

Ass'n  —  156. 
Lehman-Charley     v.     Bartlett—  363, 

384,   418,  419,  422,  428,  441,  442, 

446,  453. 

Le  Lievre  v.  Gould  —  374. 
Lemars   Shoe  Co.   v.   Lemars   Shoe 

Mfg.  Co.—  118. 
Lenkeit  v.  Mitchell—  367. 
Lennox  Pub.  Co.,  The,  Re  —  406,  475, 

476. 
Leominster  Canal  Navigation  Co.  v. 

Shrewsbury  &  Hereford  Ry.  Co.  — 

121. 
Lewis   v.    Berryville    Land   &   Imp. 


Lewis  v.  Fisher—  140,  143. 

Lewis  v.   Smith  —  142. 

Lewis  &  Nelson's  Appeal  —  282. 

Lieb  v.  Painter  —  567. 

Life  Ass'n  of  England,  Ltd.,  Re  —  See 

Blake's  Case. 
Lightfoot  v.  Davis  —  463. 
Limited  Inv.  Ass'n  v.  Glendale  Inv. 

Ass'n—  176,  320,  327,  354,  355,  511, 

539,  548. 
Lindsay   Petroleum   Co.    v.    Hurd  — 

291,   292,   293,  294,   295,  322,  335, 

349,  370,  401,  403,  434,   511,  517, 

546. 
Lindsey  v.  Great  Northern  Ry.  Co. 

—  See   Earl   of   Lindsey   v.   Great 

Northern   Ry.    Co. 
Lindsey   v.    Pasco   Power  &   Water 

Co.—  158. 

Linn  v.  Dixon  Crucible  Co.  —  553. 
Liquidators    of    the    Imperial    Mer- 


cantile Credit  Ass'n  v.  Coleman — 
13,  220,  221,  226. 

Litchfield   v.   Hutchinson— 377,  378. 

Litchfield  Bank  v.  Church — 408. 

Little  Rock  &  Ft.  Smith  R.  R.  Co. 
v.  Perry — 101,  112. 

Livermore  v.  Middlesborough  Town 
Lands  Co. — 377. 

Lloyd,  Ex  parte— 560,  561. 

Lloyd  v.  Grace,  Smith  &  Co. — 368. 

Locke  v.  Wilson — 47,  367,  563. 

Lock  wood  v.   Wynkoop — 140,  141. 

Loewenberg  v.  De  Voigne — 57. 

Loewer  v.  Harris — 419. 

Logan  v.  Simpson — 50. 

Lomita  Land  &  Water  Co.  v.  Rob- 
inson—12,  17,  18,  19,  171,  174, 
175,  176,  181,  189,  194,  202,  209, 
211,  224,  233,  271,  274,  276,  282, 
292,  300,  316,  318,  319,  326,  327, 
349,  350,  384,  398,  428,  436,  470, 
482,  511,  539,  550. 

Londesborough,  Ex  parte — 569. 

London   Assurance   Co.   v.    Drennen 


London    &    County    Gen'l    Agency 

Ass'n,    Ltd.,    In    re — See    Hare's 

Case. 
London  &  Leeds  Bank,  In  re — 370, 

477. 
London    &    Provincial    Starch    Co., 

The,  Re— 179. 
London  &  Southwestern  Canal,  Ltd., 

In  re— 179,  313. 
London   &    Staffordshire    Fire    Ins. 

Co.,  In  re — 383,  472. 
London   Trust   Co.    v.    Mackenzie — 

183,  247,  249,  284,  312,  329,  488. 
Long  v.  Citizens'  Bank — 76. 
Longman  v.  Hill — 146. 
Lord  v.  Goddard — 376. 
Lorillard  v.  Clyde-^32,  33. 


TABLE    OF    CASES. 


(The  references  are  to  the  pages.) 


Lottman  Bros.  Mfg.  Co.  v.  Houston 
Waterworks  Co. — 133. 

Louclenslager  v.  Woodbury  Heights 
Land  Co.— 7,  19,  24,  25,  171,  172, 
181,  188,  193,  194,  202,  219,  221, 
224,  302,  399,  400. 

Lovelace  v.  Suter — 376,  379. 

Low  v.  Bouverie — 374. 

Low  v.  Connecticut  &  Passumpsic 
Rivers  R.  R.  Co.— 78,  79,  81,  98, 
101,  103,  109,  110,  111,  120,  155, 
156,  157,  158,  160. 

Lowance  v.  Johnson — 438. 

Lowestoft,  etc.,  Tramways  Co.,  In 
re— 579. 

Lucas  v.  Beach — 537. 

Luedecke  v.  Des  Moines  Cabinet  Co. 
—119,  120. 

Luetzke  v.  Roberts — 406,  409,  451. 

Luin  v.  Chicago  Grill  Co.— 93. 

Lungren  v.   Pennell— 222,  225,  452. 

Lunn  v.  Shermer — 495. 

Lurgan's  Case,  Lord — 442,  443. 

Lydney  &  Wigpool  Iron  Ore  Co.  v. 
Bird— 10,  12,  16,  22,  152,  153,  160, 
161,  172,  176,  178,  305,  309,  328, 
349,  485. 

Lynch  v.  Murphy — 417. 

Lynde  v.  Anglo- Italian  Hemp  Spin- 
ning Co. — 442. 

Lyon's  Case — 572. 

Lyon  v.  (Taylor  for  use  of)  Wor- 
cester— 198. 

M. 

Mabey  v.  Adams — 364. 
Mac  Ardell  v.  Olcott— 296. 
Macbride   v.    Lindsay — 411,   452. 
MacDougall  v.   Gardiner — 346. 
Macey  Co.  v.  Globe  Wernicke  Co. — 
77. 


Macey    Co.     v.     Macey — See     Fred 

Macey  Co.  v.  Macey. 
MacGregor    v.    Deal    &    Dover    Ry. 

Co.— 553. 
Mack  v.  Latta — 441,   446,  452,  453, 

455. 
Mackey  Baking  Co.  v.  Mackey — 20, 

212,  214,  291,  310. 
Macklem  v.  Fales — 417. 
Macleay  v.  Tait— 219«  271,  389,  390, 

392,  394. 

MacNaughton   v.  Osgood — 346. 
Maddick  v.  Marshall — 562. 
Madrid  Bank,  In  re — See  Ex  parte- 

Williams. 

Madrid  Bank  v.  Pelly— 179. 
Magill  v.  Rendigs — 35. 
Magnolia    Shingle    Co.    v.    J.    Zira- 

mern's  Co.— 582,  586. 
Mahan  v.  Wood — 130,  572. 
Maine  v.  Butler — 33. 
Maine  v.  Midland  Inv.  Co.— 355,  368, 

382,  416. 
Maine    Northwestern    Dev.    Co.    v. 

Northern  Commercial  Co. — 447. 
Mair  v.  Rio  Grande  Rubber  Estates, 

Ltd.— 383. 

Maitland's  Case— 560,  561. 
Manahan  v.  Varnum,  139. 
Manchester  M.  &  Tramways  Co.,  In 

re— 155,  165,  579. 
Mangold  v.  Adrian  Irr.  Co. — 19,  20, 

247,  302,  305,  310. 
Manhattan  Trust  Co.  v.  Seattle  Coal 

&  Iron  Co. — 432. 
Manistee  Lumber  Co.  v.  Union  Nat'l 

Bk.— 68. 

Mann  v.  Edinburgh  Northern  Tram- 
ways Co. — 183. 
Manning  v.  Berdan — 451. 
Mantle  v.  Jack  Waite  Min.  Co. — 97, 

122. 


TABLE   OF  CASES. 


xli 


(The  references  are  to  the  pages.) 


Manton  v.  Ray — 60. 

Marchand  v.  Loan  &  Pledge  Ass'n 

—152,  155. 
Marconi's  Telegraph  Co.  v.  Cross — 

81,  82,  140,  141,  145. 
Marie  v.  Garrison — 32,  34. 
Marion  Trust  Co.  v.  Blish — 474. 
Markwell's  Case — 562. 
Marseilles  Land  Co.  v.  Aldrich — 41. 
Marsh  v.  Talker— 376,  378,  379,  380. 
Marshall  v.  Keaeh — 584. 
Marshall  v.  Morrison — 394. 
Marston  v.  Singapore  Rattan  Co. — 

35,  70. 
Marten  v.  Paul  O.  Burns  Wine  Co. 

—467. 

Martin  v.  Fewell— 581,  582. 
Martin  v.   Pensacola   &  Georgia  R. 

R.  Co.— 479,  573. 
Martin  v.   Remington-Martin  Co. — 

41. 
Martin    v.    Second    and    Third    St. 

Pass.  Ry.  Co.— 120. 
Martin   v.    South    Salem    Land   Co. 

—474,  478. 
Maryland  Apartment  House  Co.  v. 

Glenn— 97,  101,  107. 
Marysville  Elec.  L.  &  P.  Co.  v.  John- 
son—130,  571. 
Marzetti's  Case— 152,  164. 
Mason    v.    Carrothers — 20,   21,   151, 

157,  159,  204,   213,  214,  217,  226, 

236,   238,  246,   253,  263,  265,  284, 

285,  289,  305,  311,  339. 
Mason  v.  Harris— 81,  232,  347,  353, 

506. 
Mason's  Hall  Tavern  Co.,  Ltd.,  In  re 

— See  Orgill's  Case. 
Mathew's  Case — 404,  405,  565. 
Mathews  v.  Damainville — 128. 
Matlock  v.  Reppy — 495,  497. 


Mattern  v.  Canavan — 440,  463,  528, 

538. 

Maturin  v.  Tredinnick — 468. 
Maudsley  v.  Field's  Case— 562,  565. 
Maxey  v.  Rideout — 34,  144. 
Maxwell    v.    McWilliams— 195,    320, 

440,  463,  508,  538,  539. 
Maxwell  v.  Port  Tennant,  etc.,  Co. 

—511. 
McAleer   v.    Horsey — 399,   400,   402, 

415,  452,  469. 
McAleer    v.    McMurray — 337,    369, 

429. 
McAllister  v.  Am.  Hosp.  Ass'n — 163, 

176,   187,   313,  489. 
McArthur  v.  Times   Printing  Co. — 

81,  82,  83,  90,  93,  120,  150. 
McBryan  v.  Universal  Elevator  Co. 

—365. 

McCallum  v.  Purssell  Mfg.  Co. — 129. 
McCally  v.  Blue  Ribbon  Gum  Co. — 

91. 

McCampbell  v.  Obear— 123,  124. 
McCandless  v.  Inland  Acid  Co.— 136, 

138. 

McCausland  v.  Hill— 132. 
McClanahan  v.  Ivanhoe  Land  Co. — 

444. 
McClymonds    v.    Stewart— 124,    125, 

413. 
McConnell  v.  Wright— 375,  384,  418, 

420,  457,  497,  498. 
McCord    v.    Southwestern    Sundries 

Co.— 131. 

McCormick  v.   Seeberger — 141. 
McCracken  v.  Robison— 39,  234,  238, 

257,  258. 

McCutcheon  v.  Dittman— 128. 
McDermott    v.    Harrison — 75,    441, 

476. 
McDonough  v.   Bank  of  Houston — 

152,  155,  162,  166. 


xlii 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


McElhenny's  Appeal— 188,  193,  222, 

305,  306,  353. 
McElroy  v.  Harnack — 416. 
McElwee  Mfg.  Co.  v.  Trowbridge — 

126. 

McEwan  v.   Campbell— 167,  560. 
McEwen   v.   Harriman   Land   Co. — 

277,  278,  286,  348. 
McFall  v.  McK.  &  Y.  Ice  Co.— 143. 
McGuire  v.  Hartford  Fire  Ins.  Co. — 

317. 

Mcllquham  v.  Taylor — 43. 
McKay's   Case— 162,    176,   178,   180, 

186,  204,  312,   313,  335,  485,  487, 

488. 

McKee  v.  Rudd— 365/  462. 
McKeown  v.  Boudard-Peveril  Gear 

Co.— 268,  386. 
McLeary  v.  Dawson — 139. 
McLellan   v.    Detroit   File   Works — 

90,  113. 

McLennan  v.  Boutell — 34. 
McMullen  v.  Ritchie — 158. 
McNeil  v.   Fultz — 44,  63. 
McNeill's  Case — 476. 
McNulta  v.  Corn  Belt  Bank— 232. 
McQuiddy   Printing  Co.   v.   Head — 

141. 
McRee  v.  Quitman  Oil  Co. — 6,  140, 

144,  581. 

McVicker  v.  Cone — 77. 
McWethy  v.  Aurora  Elec.  Light  Co. 

—137. 

Medill  v.  Collier^587. 
Megibben's  Admrs.  v.  Perin — 60. 
Meholin  v.  Carlson — 408,  473. 
Meinershagen  v.  Taylor — 413. 
Meinhard,  Schaul  &  Co.  v.  Beding- 

field  Mercantile  Co. — 140,  585. 
Melhado  v.  Porto  Alegre  Ry.  Co. — 

80,  82,  96,  98,  102,  152,  155,  156. 
Melvin  v.  Lamar  Ins.  Co. — 286,  408. 


Mercantile  Nat'l  Bk.  v.  Parsons — 
126. 

Merchants'  Fire  Office,  Ltd.  v.  Arm- 
strong— 159,  164. 

Merchants  Nat'l  Bk.  v.  Eckels — 166. 

Merchants'  Nat'l  Bk.  v.  Robison — 
416. 

Merrick  v.  Consumer's  H.  &  E.  Co. — 
407,  408. 

Merriman  v.  Magivney — 583,  584. 

Mesinger  v.  Mesinger  Bicycle  Sad- 
dle Co.— 81,  90,  91,  127. 

Metcalf  v.  American  School  Furni- 
ture Co.— 358. 

Methodist  Episcopal  Church  v.  Pick- 
ett— 584. 

Metropolitan  Bank  v.  Heiron — 295. 

Metropolitan  Coal  Consumer's  Ass'n 
— See  Karberg's  Case,  Wain- 
wright's  Case  and  Ex  parte  Ed- 
wards. 

Metropolitan  Coal  Consumer's  Ass'n 
v.  Scrimgeour — 161. 

Metropolitan  Elevated  R.  R.  Co.  v. 
Manhattan  Elevated  R.  R.  Co. — 
205,  296. 

Metzger  v.  Knox — 75. 

Meyer's  Case — 571. 

Meyer  v.  Blair— 123,  125,  174,  408, 
412,  413. 

Meyer  v.  Page— 340,  506,  535. 

Michener  v.  Payson — 473. 

Michigan  Midland  &  Can.  R.  R. 
Co.  v.  Bacon— 131,  572. 

Middle  Branch  Mut.  Tel.  Co.  v. 
Jones — 565. 

Middleton  v.  Davis  &  Rankin  Bldg. 
&  Mfg.  Co.— 126. 

Midland  Ry.  Co.  v.  Gordon— 572. 

Midland  Union,  etc.,  Ry.  Co.,  Matter 
of — See  Norbury's  Case. 


TABLE  OF  CASES. 


xliii 


(The  references  are  to  the  pages.) 


Midwood   Park  Co.   v.   Baker — 175, 

186,  194,  211,  279,  316,  317,  535. 
Milburn    v.    Wilson— 368,    369,   402, 

407,  537. 

Mildenberg  v.  James — 146. 
Miller's  Case— 178. 
Miller  v.  Baker— 536,  538. 
Miller  v.  Barber— 368,  410,  452,  459, 

495,  538. 

Miller  v.  Denman— 15,  560,  567,  579. 
Miller  v.  Hanover  Junction  &  Sus- 

quehanna  R.  R.  Co.— 123,  480. 
Miller  v.  Wild  Cat  Gravel  Road  Co. 

—479. 

Mills  v.  Hendershot— 38. 
Mills    v.    Northern    Ry.    of    Buenos 

Ayres  Co.— 338,  348. 
Milwaukee  Cold  Storage  Co.  v.  Dex- 
ter—8,  26,  174,  188,  189,  190,  191, 

193,  223,  225,  425,  482. 
Milwaukee  L.  H.  &  T.  Co.   v.  Mil- 
waukee No.   Ry. — 137. 
Minister   of  Railways   &  Canals  v. 

Quebec  So.  Ry.  Co.— 25,  181,  233, 

247,  521,   523. 
Minneapolis  Threshing  Mach.  Co.  v. 

Davis— 84,  85,  86,   122,  480. 
Miser  Gold  Mining  &  Milling  Co.  v. 

Moody— 74,  99. 
Mississippi  Lumber  Co.  v.  Joice — 17, 

18,  23,  25,  194,  310,  528,  539. 
Mississippi,  etc.,  R.  R.  Co.  v.  Cross 

—479,  573. 

Mitcalfe's  Case— 179,  488. 
Mitchell  v.  Gifford  &  Co.— 112. 
Mitchell  v.  Jensen— 583,  584,  587. 
Mitchell  v.  Patterson — 79. 
Mitchell   v.   United   States— 504. 
Mixer's   Case — 442. 
Modern   Dairy   &   Creamery   Co.   v. 

Blanket  &  H.  Supply  Co.— 113. 
Moffat  v.  Winslow— 567. 


Mohler  v.  Carder — 382. 
Mokelumne,  etc.,  Co.  v.  Woodbury — 

585. 

Moneypenny  v.  Hartland — 165. 
Montgomery    v.    Whitbeck — 77,    78, 

133. 
Montgomery  Iron  Works  v.  Roman 

—592. 
Montgomery  Light  &  Power  Co.   v. 

Lahey— 297,  342. ' 

Montgomery    So.    Ry.    Co.    v.    Mat- 
thews— 443. 
Moore  v.  Burke— 218,  370,  419,  420, 

421,  461. 

Moore  v.  Explosives  Co.,  Ltd. — 421. 
Moore  v.  Garwood — 568,  573,  574. 
Moore  V.   Hanover  Junction   R.   R. 

Co.— 573. 

Moore  v.  Scott— 378. 
Moore  v.   Silver  Valley  Mining  Co. 

—338,  340,  342,  344,  359. 
Moore  v.   Universal  Elevator  Co. — 

524. 
Moore  v.  Warrior  Coal  &  Land  Co. 

—5,  17,  18,  19,  172,  185,  302,  308, 

310,  319,  326,  336,  337,  402. 
Moore  &  De  La  Torre's  Case — 402. 
Moore  &  Handley  Hardware  Co.  v. 

Towers    Hardware    Co. — 74,     77, 

112,  117,  118. 

Moore  Bros.  &  Co.,  Ltd.,  In  re — 403. 
Morgan  v.  Bon  Bon  Co.,  Inc. — 39,  40. 
Morgan  v.  Ravey — 351. 
Morgan    v.    Skiddy— 362,    363,    369, 

370,   388,  421. 
Morgan  v.  Struthers— 123,  124,  174, 

408,  411,  412,  413. 
Morrisey  v.  Williams — 478. 
Morrison,  Ex  parte — 562. 
Morrison    v.    Gold    Mountain    Gold 

Mining  Co.— 74. 


xliv 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


Morrison  v.  Ogdensburgh,  etp.,  R.  R. 

Co.— 113. 
Morrow  v.  Nashville  Iron,   Steel  & 

Charcoal  Co.— 124. 
Morse  v.  Swits — 365. 
Morton  v.  Hamilton  College — 106, 

109. 

Moseley  v.  Cressey's  Co. — 573. 
Mosier  v.  Parry — 140. 
Moulton   v.   Warren   Mfg.  Co. — 61. 
Mt.  Carmel  Tel.  Co.  v.  Mt.  Carmel 

&  Flemingburg  Tel.  Co.— 580. 
Mt.  Sterling  Coalroad  Co.  v.  Little — 

132. 

Mowatt,   Ex  parte — 569. 
Mowatt    v.    Lord    Londesborough — 

568,  569,  574. 

Mowatt  &  Elliott,  Ex  parte — 569. 
Muck  v.  Hayden — 415,  417. 
Muir    v.     Forman's    Trustees — 165, 

166,  167,  578,  579. 
Muirkirk,  etc.,   Rys.— 165,  166,  167, 

578,  579. 
Mulholland    v.    Washington    Match 

Co.— 441,  462,  468,  470. 
Mulvihill   v.    Vicksburg   Ry.    Power 

&  Mfg.  Co.— 39,  97. 
Muncy  Traction  Engine  Co.  v.  Green 

—87. 
Munson  v.   Magee—83,  84,  92,  146, 

147. 
Munson     v.     Syracuse,     Geneva     & 

Corning  R.  R.  Co.— 75,  78,  90,  92, 

140,  189,  205,  321. 
Munster,  Ex  parte — 471. 
Murdock  v.  Lamb — 583. 
Murray   v.  Tolman — 415. 
Mutual    Aid    Ass'n    v.    Hogan — See 

Chicago  City  Ry.  Employees  Mu- 
tual Aid  Ass'n  v.  Hogan. 
Myott  v.  Greer— 121. 


N. 

Nahoum  v.  Marcoglou  &  Co.,  Inc. — 

129. 
Nant-Y-Glo  &  Blaina  Ironworks  Co. 

v.    Grave— 9,    17,    179,    185,    293, 

297,  310,  312,  329,  487. 
Nash  v.  Calthorpe — 371,  394. 
Nash  v.  Minnesota  Title  Ins.  &  Trust 

Co.— 366,   376,  425. 
Nash  v.  Rosesteel— 3"?6. 
Natal  Land  Co.  v.  Pauline  Colliery 

Synd.— 83,  134. 
National  Bank  of  Commerce  v.  New 

Bedford — 499. 
National  Bank  of  Dakota  v.  Taylor 

—470. 
National  Conduit  Mfg.  Co.  v.  Conn.  ' 

Pipe  Mfg.  Co. — 77,  126. 
National   Exchange   Co.    v.   Drew — 

368,  451. 
National   Leather  Co.   v.   Roberts — 

407,  414. 
National     Motor     Mail-Coach     Co., 

Ltd.,  In  re— 83,  152,  155. 
National  Park  Bank  v.  Nichols — 466. 
National  Pressed  Brick  Co.,  In  re — 

443,  467. 
National  Security  Bank  v.  Cushman 

—128. 

National  Trust  Co.  v.  Gleason — 549.- 
National  Union  Bank  of  Md.  v.  Hol- 

lingsworth— 117,  119,  120. 
Naumberg  v.  See— 313,  316,  317,  356, 

488. 

Neal  v.  Clark— 299. 
Nebraska  Chicory  Co.  v.  Lednicky — 

131. 
Negley  v.  Hagerstown  Mfg.  Min.  & 

Land  Imp.  Co.— 371,  442. 
Neher  v.  Hansen— 495. 
Nelles  v.  Hesselstine — 89. 


TABLE   OF  CASES. 


xlv 


(The  references  are  to  the  pages.) 


Nelson  v.  Luling — 877,  416. 
Nester  v.  Gross — 135. 
Neviiis  v.  Henderson — 167. 
Newbery  v.  Garland — 363. 
Nevvberry  Land  Co.  v.  Newberry — 

131,  134. 
New    Brighton,    etc.,    R.    R.    Co.    v. 

Pittsburgh,  etc.,  R.  R.  Co.— 137. 
New  Brunswick  &  Canada  Ry.,  etc., 
Co.   v.   Conybeare— 217,  422,  428, 
437,  443,  462. 

New  Brunswick  &  Canada  Ry.,  etc., 

Co.  v.  Muggeridge— 214,  382,  384, 

387,  388,  398,   420,  421,  422,  450, 

460. 

New  Jersey  Stone  Co.  v.  Vreeland — 

397,  417,  441,  446,  453,  479. 
Newland  Hotel  Co.  v.  Wright — 408. 
Newport  &  Maysville  R.   R.  Co.  v. 

Hay— 155. 

New  Sombrero  Phosphate  Co.  v.  Er- 
langer— 17,  20,  24,   190,  191,  193, 
205,   208,  211,  213,   218,  219,   220, 
223,  276,  277,  294,  295,  319,  335, 
351,  352,  354,   355,  401,   406,  420, 
427,  437,  537,  538,  546,  550. 
Newton  v.   Belcher — 560. 
Newton  v.  Blunt— 573. 
Newton  v.  Liddiard— 560. 
Newton  v.  Wooley — 62. 
Newton    National    Bank    v.    New- 

begin — i20,   477. 
N.  Y.  &  N.  H.  R.  R.  Co.  v.  Ketchum 

—154,  155,  159. 
Nicholay's  Case — 562. 
Nichols  v.  Buell — 402,  413,  416,  445. 
Nichols  v.  North  Met.   Ry.   &  Can. 

Co.— 563. 

Nickerson   v.   English— 122,  408. 
Nickoll's    Case— 122. 
Nicol's  Case— 370,  411,  474,  478. 


Niles  v.  Graham — 149. 
Nockells  v.  Crosby — 567,  574. 
Non-Electric  Fibre  Mfg.  Co.  v.  Pea- 
body— 131. 

Norbury's  Case— 144,  560,  562,  565. 
Norcross  Butter  &  Cheese  Mfg.  Co. 

v.  Summerour — 132. 
Norman  v.  Mitchell — 572. 
Norris  v.  Cottle--560,  561. 
Norris  v.  Reynolds — 124. 
North  American  Loan  &  Trust  Co.  v. 
Colonial  &  U.   S.  Mtge.  Co.— 114. 
North  Anson  Lumber  Co.  v.  Smith 

—93,  97. 
North    Australian    Territory    Co. — 

See  Archer's  Case. 
North  Sydney  Inv.  &  Tram.  Co.  v. 

Higgins— 96. 

Northern  Central   Ry.   Co.   v.   Wai- 
worth— 60. 
Northern   Central    Michigan    R.    R. 

Co.  v.  Eslow — 87. 

Northern  Trust  Co.  v.  Markell — 59. 
Northumberland  Avenue  Hotel  Co., 

In  re— 80,  82,  83,  112. 
Northup   v.    Altadena    Min.   &   Inv. 

Synd.— 116. 
North-West   Transportation   Co.    v. 

Beatty— 232. 
Northwestern      Creamery      Co.      v. 

Lanning — 569. 
Norwich   Lock  Mfg.  Co.   v.   Hocka- 

day— 571. 

Nott  v.  Clews— 233. 
Nugent  v.  Cincinnati,  H.  &  I.  8.  L. 

R.  R.  Co.— 380,  383,  406. 
Nulton  v.  Clayton— 131. 
Nysewander  v.  Lowman — 495. 

0. 

Oakes  v.  Cattaraugus  Water  Co. — 


xlvi 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


76,  81,  82,  89,  90,  91,  93,  98,  118, 
120,  127,  130,  140. 
Oakes  v.   Turquand — 217,  441,  450, 

461,  466,  474. 
O'Brien  v.  Wheelock — 294. 
Ogilvie  v.  'Currie — 446,  470,  474. 
Ogilvie  v.  Knox  Ins.  Co. — 473. 
Oil  City  Land  &  Imp.  Co.  v.  Porter 

—217,  442,  461. 

Old  Dominion  Copper,  etc.,  Co.  v. 
Bigelow-^t,  5,  7,  17,  20,  23,  24, 
29,  181,  189,  194,  200,  203,  208, 
211,  213,  226,  228,  233,  234,  235, 
236,  244,  245,  246,  247,  249,  257, 
258,  259,  260,  277,  279,  284,  289, 
290,  292,  293,  297,  298,  305,  306, 
308,  309,  319,  326,  327,  333,  336, 
349,  353,  354,  357,  359,  432,  481, 
482,  486,  491,  523,  539,  550. 
Old  Dominion  Copper,  etc.,  Co.  v. 
Lewisohn— 21,  187,  201,  213,  228, 
238,  245,  251,  255,  257,  258,  259, 
261,  263,  266,  277,  335,  349,  359, 
430,  536. 
Oldham  v.  Mt.  Sterling  Imp.  Co. — 

81,  82,  438,  442. 
Ollesheimer  v.  Thompson  Mfg.  Co. — 

86,  123,  408. 

Olympia,  Ltd.,  In  re— 8,  20,  22,  23, 

26,  27,  172,  175,  182,  200,  202,  203, 

214,   218,   227,   247,   269,   305,   308, 

320,  325,  349,  361,  486,  539,  550. 

Olympia  Min.  Co.  v.  Kerns — 130. 

Olympia  Min.  &  Mill.  Co.  v.  Kerns — 

130,  136. 

Omaha  Loan  &  Trust  Co.  v.  Good- 
man— 84. 

Omnium  Elec.  Palaces  Lira.  v. 
Baines— 25,  193,  222,  249,  297,  302, 
320,  325. 

O'Neill  v.  Patterson— 149. 
Orgill's   Case— 178. 


Ormerod's  Case — 178,  179,  488. 
O'Rorke  v.  Geary— 140,  141,  146. 
Orr  v.  McLeay — 567. 
Ossippee  Hosiery  &  Woolen  Mfg.  Co. 

v.  Canney — 466. 

O' Sullivan  v.  Clarkson— 331,  487. 
Ottinger  v.  Bennett — 427. 
Overend,  Gurney  &  Co.,  In  re — 441, 

474. 
Overend  &  Gurney  Co.  v.  Gibb— 335, 

433,  434. 
Owensboro  Wagon  Co.  v.  Bliss — 583, 

585. 


Pacaya  Rubber  &  Produce  Co.,  Ltd., 
In  re— 383,  442. 

Paddock  v.  Fletcher— 219,  400,  402r 
410,  436,  458. 

Paducah  Land,  Coal  &  Iron  Co.  v. 
Mulholland— 311. 

Page  v.  Parker — 495. 

Page  v.  Wells — 495. 

Panhandle  Packing  Co.  v.  String- 
fellow— 86. 

Parbury's  Case — 428,  442. 

Park  v.  Minneapolis,  St.  Paul,  etc., 
Ry.  Co.— 573. 

Park  v.  Modern  Woodmen  of  Amer- 
ica—74. 

Parker  v.  Boyle— 25,  172,  194,  202, 
208,  211,  228. 

Parker  v.  Nickerson— 187,  189,  201,. 
305,  306,  482. 

Parker  v.  United  States — 504. 

Parkin  v.  Fry— 551,  564. 

Parks  v.  Gates — 530,  537. 

Parrott  v.  Byers— 338. 

Parson  v.  Joseph— 283,  284,  342. 

Parsons  v.  Hayes— 21,  233,  235,  236, 
251,  254,  284. 


TABLE  OF  CASES. 


xlvii 


(The  references  are  to  the  pages.) 


Parsons  v.  Johnson — 376,  495. 

Parsons  v.  McKinley — 472. 

Parsons  v.  Spooner — 142,  168. 

Patrick  v.  Reynolds — 562. 

Patterson  v.  Brown — 551,  564. 

Patterson  v.  Franklin— 365,  433. 

Patterson   v.    Hewitt— 294. 

Patty  v.  Hillsboro  Roller-Mill  Co. 
—86. 

Paul  &  Beresford's  Case — 188. 

Pawle's  Case — 476. 

Paxton  v.  Bacon  Mill.  &  Min.  Co.— 
76,  113,  116,  118,  119. 

Paxton  Cattle  Co.  v.  First  Nat'l  Bk, 
—98,  110. 

Payne  v.  New  South  Wales,  etc.,  Co. 
—77. 

Peabody  v.  Flint— 297,  338,  354. 

Pearce   v.    Sutherland — 127. 

Pearsall  v.  Tenn.  Central  Ry.  Co. — 
76,  91,  538. 

Pearson's  Case— 178,  310,  312,  313, 
488. 

Pearson's  Exrs'  Case — 561,  564. 

Pearson  &  Son,  Ltd.  v.  Dublin  Cor- 
poration—219,  271,  373. 

Peek  v.  Derry— 362,  370,  373,  420, 
423,  457,  468,  497,  498,  499,  500. 

Peek  v.  Gurney— 284,  351,  352,  362, 
363,  364,  366,  381,  386,  397,  437, 
444,  463,  469,  470,  471,  473,  474, 
475,  486. 

Peek  v.  Steinberg-^4,  74,  111,  125. 

Peel's  Case — 466. 

Pelly,  Ex  parte — See  In  re  Anglo- 
French  Co-operative  Society. 

Peninsula  Ry.  Co.  v.  Duncan — 131. 

Penn  Match  Co.  v.  Hapgood — 75,  84, 
97,  133,  149. 

Pennell  v.  Lathrop — 82. 

Pennsylvania  Knitting  Mills  v.  Bibb 
Mfg.  Co.— 118. 


Pennsylvania  Tack  Works  v.  Sowers 

—236. 
Penobscot  R.  R.  Co.  v.  Dummer — 

131. 
Penobscot  R.  R.  Co.  v.  White — 410, 

411. 

Pentelow's  Case — 476. 
People   v.   California   Safe   Dep.  & 

Trust  Co. — 477. 
People  v.  Equitable  Life  Assur.  Soc. 

—354. 

People's   Ferry   Co.    v.    Balch— 131. 
People's  Nat'l  Bank  v.  Taylor — 450, 

451. 

Perin  v.  Megibben— 60. 
Perkins  v.   Merchants'  &  Farmers' 

Bank-^67,  471. 
Perkins  v.  Rouss — 582. 
Perrier,    Ex   parte — 489. 
Perrin  v.   Smith— 57,  64. 
Perry  v.  Hale — 573. 
Perry  v.   Little  Rock  &  Ft.   Smith 

Ry.  Co.— 80,  101,   112. 
Persse's  Case — See  In  re  ^Etna  Life 

Ins.  Co.,  Ltd. 
Peters   v.    Lohman — 379. 
Petre    (Lord)    v.  Eastern  Counties 

Ry.   Co.— 103,   104. 
Petrie  v.  Guelph  Lumber  Co. — 374, 

383,  398,  451,  467,  500,  537. 
Philadelphia  &  Reading  Coal  &  Iron 

Co.  v.  Butler— 337. 
Philadelphia  Creamery   Supply  Co. 

v.  Davis  &  Rankin  Bldg.  &  Mfg. 

Co.— 117. 
Philadelphia    Medical    Pub.    Co.    v. 

Wolfenden — 131. 
Philes  v.  Hickies— 42,  62. 
Phillips   v.   Homf ray— 351,   352. 
Phoenix  Warehousing  Co.  v.  Badger 

— 88,  408. 
Phosphate  Sewage  Co.  v.  Hartmont 


xlviii 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


—9,    11,    12,    221,    293,    313,    322, 
328,  330,  335,  351,  488,  547. 
Pietsch  v.  Krause— 282,  358,  537. 
Pietsch    v.    Milbrath— 28,    172,    181, 
194,   203,   217,   247,   290,  302,   337, 
354,  463. 

Pigott  v.  Graham — 460. 
Piscataqua  Ferry  Co.  v.  Jones — 479. 
Pitman   v.   Chicago  Joplin  L.   &   Z. 

Co.— 120. 

Pitt  &  Kellogg— 67. 
Pitts    v.    Steele    Mercantile   Co. — 4, 

97,  101,  111. 
Pittsburg  &   Steubenville  R.  R.  Co. 

v.   Gazzam — 111. 
Pittsburg  &  Tennessee   Copper  Co. 

v.  Quintrell— 75,  83,  102. 
Pittsburg  Mining  Co.   v.   Spooner — 
7,    97,    189,    198,    205,    206,    207, 
227,   230,   242,   247,   266,  280/282, 
305,  306,  307,  312,   326,  327,  336, 
361,    429,    439,    496. 
Plank's  Tavern  Co.  v.   Burkhard — 

87. 
Planters  &  Merchants  Ind.   Packet 

Co.  v.  Webb— 87. 
Planters  &  Miners  Bank  v.  Padgett 

—582. 

Plaquemines  Tropical   Fruit  Co.   v. 
Buck— 7,  17,  20,   24,   25,   27,  164, 
171,  176,   187,  196,  198,  202,  204, 
209,  219,  247,  266,  307,  310. 
Pollok  v.  Dodge  Mfg.  Co.— 367. 
Pollitz  v.   Gould— 342,  344. 
Pollitz   v.   Wabash  R.   R.  Co.— 231, 

344. 

Porch  v.  Agnew  Co. — 162. 
Porter  v.  Blair — 64. 
Porter    v.    Lassen   County    Land   & 

Cattle  Co.— 205. 
Porter  v.  Sabin— 340,  352,  353. 
Possell  v.  Smith— 93,  111. 


Postage  Stamp  Automatic  Delivery 

Co.,  In  re— 179,  249,  257. 
Potts  v.  Lambie — 469. 
Poughkeepsie,  etc.,  Co.   v.   Griffin — 

87. 
Powell  v.  Georgia  F.  &  A.  Ry.  Co. — 

158. 

Powers  v.  Knapp — 88. 
Pratt  v.  California  Miu.  Co.— 294. 
Pratt  v.  Finkle— 140. 
Pratt  v.  Oshkosh  Match  Co.— 76,  81, 

84,  91,  115. 

Preston,  Ex  parte — 163,  220. 
Preston    v.    Liverpool,    Manchester, 

etc.,  Ry.  Co.— 3,  103,  113. 
Preston  v.  Proprietors  of  the  Liver- 
pool, Manchester,  etc.,  Ry.  Co. — 

76,  103,  113,  120. 
Prewitt  v.  Trimble— 380. 
Prichard's  Case — 566. 
Priest  v.  White— 370,  429. 
Primeau  v.  Granfield — 528. 
Proskey  v.  Manning — 47. 
Pulsford  v.  Richards— 306,  327,  383, 

384,  402,  442,  443. 

Q. 

Quality  Shoe  Shop,  In  re— 93. 

Quartz  Glass  &  Mfg.  Co.  v.  Joyce — 
122. 

Quee  Drug  Co.  v.  Plaut— 89. 

Queen  v.  Aspinall— 366,  503. 

Queen  v.   Barber — 501. 

Queen  City  Furniture  Co.  v.  Craw- 
ford—81,  82,  140,  141,  146. 

Quinn  v.  Am.  Bankers  Assur.  Co. — 
120. 

R. 

Racine  Seeder  Co.  v.  Joliet,  etc.,  Co. 
—125. 


TABLE   OF  CASES. 


xlix 


(The  references  are  to  the  pages.) 


Rader  v.  Bristol  Land  Co. — 452. 
Raegener  v.  Brockway— 86,  129,  133. 
Railroad    Gazette    v.    Wherry — 143, 

537,  587. 

Raisbeck  v.  Oesterricher — 586. 
Rambaut  v.  Tevis— 143,  565. 
Ramsey  v.  Thompson  Mfg.  Co. — 406, 

474,  477. 

Ramskill  v.   Edwards — 298. 
Rankin   v.   South  West  Brewery  & 

Ice  Co.— 542. 

Ransom  v.  Brinkerhoff — 126. 
Rapid  Hook  &  Eye  Co.  v.  De  Ruy- 

ter— 93,  122. 

Rathbone  v.  Tioga  Nav.  Co.— 138. 
Rau    v.    Seidenberg — 60. 
Rau  v.  Union  Paper  Mill  Co.— 139. 
Rawlins  v.  Wickham — 470. 
Reading  Finance  &  Securities  Co.  v. 

Harley — 41. 
Red  River  Valley  Land  &  Inv.  Co. 

v.  Smith— 128. 
Red  Wing  Hotel  Co.  v.  Friedrich — 

85,  131. 

Redding  v.  Godwin — 496,  499. 
Redding  v.  Wright-— 459. 
Redgrave  v.  Kurd— 382,  460. 
Reed    v.    Benzine-ated    Soap   Co. — 

472. 

Reed  v.  Gold— 371. 
Reed   Bros   v.   First  Nat'l  Bank  of 

Weeping  Water — 119. 
Reese  River  Silver  Mining  Co.,  In 

re — See  Smith's  Case. 
Reese   River    Silver   Mining  Co.    v. 

Smith— 382,  398,  442,  475,  476. 
Reeve  v.  Dennett — 418,  419. 
Regina  v.  Brinsmead — 502. 
Regina   v.    Esdaile— 502. 
Regina  v.  Lupton — 502. 
Rehbein  v.  Rahr— 87,  123,  125,  480. 
Reichwald  v.  Commercial  Hotel  Co. 


Reid  v.   London  &  North  Stafford- 
shire Fire  Ins.  Co. — 467. 
Reinhard  v.   Virginia   Lead   Mining 

Co.— 138. 

Rennie  v.  Clarke — 562. 
Reusens  v.  Gerard — 364,  463. 
Rex  v.  Berengen — 503. 
Rex  v.  Lawson — 504. 
Rex  v.  Wright — 504. 
Reyburn  v.  Bennett — 567. 
Reynell  v.  Lewis— 3,   143,  537,  561, 

562. 

Reynolds  v.  Franklin — 496. 
Rhodesian  Properties,  Ltd.,  In  re — 

80. 

Rice's  Appeal— 189,  203,  208,  317. 
Richard   Brown  &  Son  Contracting 

Co.  v.  Bambrick  Bros.  Const.  Co. 

—82,  96,  130. 
Richard    Hanlon    Millinery    Co.    v. 

Mississippi  Valley  Trust  Co. — 13, 

176,  180,  186,  279,  314. 
Richardson  v.   Graham — 76,  82,  83, 

176,  194,  195,  402. 
Richelieu    Hotel    Co.    v.    Internat'l 

Military  Enc.  Co.— 86,  131. 
Richlands  Oil  Co.  v.  Morriss — 6,  7, 

9,    160,    161,    163,    188,    222,    224, 

225,  247,  310. 
Richmond's  Case  &  Painter's  Case — 

411. 
Rideout   v.   Nat'l   Homestead   Ass'n 

—111. 

Riley  v.  Bell— 377,  378,  459. 
Riley    v.    Packington— 168. 
Ripley  v.  Paper  Bottle  Co. — 467. 
Ritchie  v.  McMullen— 158. 
Rives  v.  Bartlett— 362,  369,  381. 
Rives   v.  Montgomery   Plank  Road 

Co.— 479. 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


Robbins  v.  Bangor  Ry.  &  El.  Co. — 

97,  101. 

Roberts,  Ex  parte— 560,  561,  562. 
Roberts   Mfg.    Co.   v.    Schlick— 143, 

536,  581,  586,  587. 
Roberts    Mfg.    Co.    v.    Wright— 143, 

537. 
Robinson  v.  Pittsburgh  &  C.  R.  R. 

Co.— 123. 

Robinson   v.    Smith — 353. 
Robinson  v.  West  Virginia  Loan  Co. 

—338,  341. 
Rochester  Dry  Goods  Co.   v.   Fahy 

—89. 
Rochester  H.  &  L.  R.  R.  Co.,  Matter 

of— 75,  133. 

Rockefeller  v.   Merritt — 496. 
Rockford,  Rock  Island  &  St.  L.  R. 

R.  Co.  v.  Sage— 152,  155,  159,  160. 
Rockford,  Rock  Island  &  St.  L.  R. 

R.  Co.  v.   Schunick— 124. 
Rockport  Coal  Co.  v.  Carter — 127. 
Rogers  v.  Garland — 70. 
Rogers  v.  Great  Southern  Accident 

&  Fidelity  Co.— 175. 
Rogers  v.  N.  Y.  &  Texas  Land  Co. 

—75,  98. 
Rogers   v.    Penobscot   Mining  Co. — 

34,  148. 

Roosevelt  v.  Hamblin — 532. 
Ropes  v.   Nilan — 127. 
Rose  v.  Foord — 567. 
Rosenheim  Shoe  Co.  v.  Home — 140, 

349. 
Ross  v.  Estates  Investment  Co. — 8, 

398,  405,  407,  420,  421,  442,   470, 

572. 

Ross  v.  Sayler — 160. 
Rotch's  Wharf  Co.  v.  Judd— 138. 
Roth  Tool  Co.  v.  Champ  Spring  Co. 

— See  B.  Roth  Tool  Co.  v.  Champ 

Spring  Co. 


Rotherham  Alum  &  Chemical  Co. — 
80,  113,  155,  156,  165. 

Roussell  v.  Burnham — 391. 

Routh   v.   Webster — 445. 

Rowe  v.  White — 557. 

Royal  Ins.  Co.  v.  Kline  Bros.  &  Co. 
—80,  134. 

Royal  Victoria  Palace  Theatre  Syn- 
dicate, In  re — See  Moore  &  De 
La  Torre's  Case. 

Ruby  Chief  Min.  &  Mill.  Co.  v.  Gur- 
ley— 112. 

Rudd  v.   Magee— 92,  146,  148. 

Rudiger  v.  Coleman — 57. 

Ruettell  v.  Greenwich  Ins.  Co. — 139. 

Ruggles  v.  Brock — 474. 

Runkle  v.  Burrage — 384. 

Russell  v.  Broadus  Cotton  Mills — 
124. 

Russell  v.  Henry  C.  Patterson  Co. 
—232. 

Russell  v.  Rock  Run  Fuel  Gas  Co. 
—29. 

Russian  Iron  Works  Co. — See  Stew- 
art's Case,  Taite's  Case,  White- 
house's  Case  and  Jackson's  Case. 

Rust-Owen  Lumber  Co.  v.  Wellman 
—582. 

Rutherford  v.  Hill— 586,  587. 

Ruttle  v.  What  Cheer  Coal  Min.  Co. 
—76. 

Rutz  v..Esler  &  R.  Mfg.  Co. — 411, 
442. 

Ryan  v.  Martin — 61. 

Ryan  v.  McLane — 60. 

Rye,  Ex  parte — 571. 

Ryland  v.  Hollinger — 141. 

s. 

Safety  Deposit  Life  Ins.  Co.  v. 
Smith— 77. 


TABLE  OF  CASES. 


li 


(The  references  are  to  the  pages.) 


Saffold,  garnishee,  v.  Barnes — 475. 

Safford  v.  Barber — 60. 

Sagadohac  Land  Co.  v.  Ewing — 294. 

Sage  v.  Culver— 201. 

St.  Johns  Mfg.  Co.  v.  Munger — 442, 

469. 
St.  Louis,  Ft.  Smith  &  W.  R.  R.  Co. 

v.  Tiernan— 8,    14,   205,  217,   223, 

233,  234,  266,  313,  488. 
St.  Louis  &  Utah  S.  M.  Co.  v.  Jack- 
son—177,  319. 
Sale    Hotel    &    Botanical    Gardens, 

Ltd.,    Re— 8,    155,    160,    162,    163, 

172,  177,  179,  218,  290. 
Salem    Mill    Dam    Corporation    v. 

Ropes— 151,  384,  410,  566. 
Salomon  v.  Salomon — 236,  247. 
Salomons  v.  British  Gold  Fields  of 

West  Africa,  Ltd.— 236,  284. 
San     Antonio     Irrigation     Co.     v. 

Deutschmann — 39. 
Sandals  v.  United  States— 504. 
Sanders  v.  Barnaby — 88. 
Sanders  v.  Herndon — 562. 
Sandford  v.   Handy— 368,  399. 
San  Diego  Gas  Co.  v.  Frame — 137. 
San  Diego  Land  &  Town  Co.  v.  Jas- 
per— 499. 
Sandusky  Coal  Co.  v.  Walker — 144, 

566. 

Sandy  River  R.  R.  v.  Stubbs — 135. 
San  Joaquin  Land  &  Water  Co.  v. 

Beecher— 86,  131. 
San  Joaquin  Land  &  Water  Co.  v. 

West— 135. 
Santaquin     Mining     Co.     v.     High 

Roller   Mining  Co.— 138. 
Santa  Rosa  City  R.  Co.  v.  Central 

St.  Ry.  Co.— 139. 
Savage  v.   Bartlett — 477. 
Savin  v.  Hoylake  Ry.  Co.— 152,  158. 


Sayles  v.   Central   National   Bk.  of 

Rome — 344. 

Sayles  v.   White— 344. 
Sayward  v.  Gardner — 137. 
Scadden   Flat   Gold   Mining   Co.    v. 

Scadden— 130. 

Schagun  v.  Scott  Mfg.  Co.— 377,  378. 
Schanck  v.  Morris — 455,  460,  469. 
Schantz  v.  Oakman— 530,  537,  580. 
Schlesinger  v.  Fisk— 233,  238,  357. 
Schloss  v.  Montgomery  Trade  Co. — 

87. 
Schmidt    v.    Nelke    Art    Lithograph 

Co.— 149. 

Schmidt  v.   Pritchard— 59,  60. 
Schneider   v.   Miller — 69. 
Schneider  v.  Sellers — 139. 
Scholey  v.  Central  Ry.  Co.  of  Vene- 
zuela— 471. 
Scholfield    Gear    &    Pulley    Co.    v. 

Scholfleld— 370,  377,  378,  379,  434, 

506. 
Schreyer  v.  Turner  Flouring  Co. — 

82,  89,  90,  93,  113,  120. 
Scott  v.  Brown,  Doering,  McNab  & 

Co.— 503. 

Scott  v.  Deweese — 477. 
Scott  v.  Dixon— 363,  364. 
Scott  v.  Farmers,  etc.,  Nat'l  Bank — 

161. 
Scott   v.    Lord   Ebury— 79,   82,   142, 

146,   169. 

Scott  v.   Snyder   Dynamite  Projec- 
tile Co.— 420. 
Scott   v.    Williams — 478. 
Scottish  N.  E.  Ry.  Co.  v.  Stewart— 

106. 
Scottish  Pacific  Coast  Min.  Co.,  Ltd. 

v.  Falkner,  Bell  &  Co.— 8,  13,  177, 

205,  206. 


lii 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


Scottish  Petroleum  Co.,  In  re  (An- 
derson's Case) — 405. 

Scottish  Petroleum  Co.,  In  re  (Wal- 
lace's Case) — 404,  405,  474,  475, 
476. 

Scovill  v.  Thayer— 283,  464. 

Scranton  Luna  Park  Ass'n  v.  Os- 
thaus— 124,  125,  409,  410,  413. 

Seacoast  R.  R.  Co.  v.  Wood — 75, 
135. 

Scale  v.   Baker— 377. 

Seaman  v.  Law — 400. 

Second  Nat'l  Bank  v.  Curtiss— 378. 

Second  Nat'l  Bank  v.  Greenville 
Screw  Point  Steel  Fence  Post  Co. 
—4,  10,  17,  188,  198,  222,  307, 
319,  327,  328,  330,  350,  353,  355, 
537. 

Security  Co.  v.  Bennington  Battle 
Monument  Ass'n — 152,  155. 

Sedalia,  etc.,  Ry.  Co.  v.  Wilkerson 
—87. 

Seddon  v.  North  Eastern  Salt  Co., 
Ltd.— 383. 

See  v.  Heppenheimer— 6,  18,  172, 
181,  191,  202,  203,  209,  224,  313, 
316,  317,  356,  488. 

Seeberger  v.  McCormick — 141,  585, 
586. 

Seeger  Refrigerator  Co.  v.  Ameri- 
can Car  &  Foundry  Co. — 126. 

Seiffert  v.  Irving — 581. 

Selkirk  v.  Windsor  E.  &  L.  S.  R. 
R.  W.  Co.— 78,  141. 

Selma  M.  &  M.  R.  R.  Co.  v.  Ander- 
son—369,  383,  397,  401,  417,  461. 

Selover  v.  Isle  Harbor  Land  Co. — 
10t  39,  59,  97,  208. 

Serrano  v.  Miller  &  Teasdale  Comm. 
Co.— 379. 

Sessions  v.  Elwell — 58,  529. 

Severson  v.  Kock — 459. 


Seymour  v.  McKinstry — 317. 
Seymour    v.    Spring    Forest    Ceme- 
tery Ass'n — 98,  233,  234,  235,  236, 

252. 

Sharpe  &  James'  Case — 562. 
Shattuck    v.    Robbins — 444,   480. 
Shaw's  Claim— 563. 
Shaw   v.   Holland— 312,   487,   488. 
Shaw  v.  Straight— 282. 
Shawnee     Commercial^  &     Savings 

Bank  Co.  v.  Miller— 7,  17,  18,  26, 

173,  204,  361,  399,  400,  401,  460. 
Sheffield's  Case— 383,  466,  480. 
Shelby  County  Ry.  Co.  v.  Crow— 86. 
Shelton  v.  Healy — 397. 
Shepheard  v.  Bray— 351,  393,  550. 
Shepheard  v.  Broome— 389,  390,  394, 

398,  497,  499,  500. 
Sherman   v.   American   Stove  Co. — 

441,  452,  453. 
Sherman  v.  Herr — 61. 
Sherwood  v.  Wallin — 59. 
Shibley  v.  Angle— 143. 
Shick   v.   Citizens   Enterprise  Co. — 

122,  442. 
Shields  v.  Clifton  Hill  Land  Co.— 

145. 

Ship's  Case — 466,  474,  571. 
Ship  v.  Crosskill— 362,  384,  419,  446, 

571,  575. 

Short  v.  Stevenson— 208,  401,  448. 
Shreveport  Nat'l  Bank  v.  Maples — 

75. 

Shrewsbury  v.  Blount — 421. 
Shrewsbury  v.   North   Staffordshire 

Ry.  Co. — See  Earl  of  Shrewsbury 

v.  North  Staffordshire  Ry.  Co. 
Shufeldt  v.   Smith— 116,  119. 
Shutts    v.    United    Box,    Board    & 

Paper  Co.— 356,  521,  525. 
Sichell,  Ex  parte— 562. 
Sigafus  v.  Porter-^35,  486,  496. 


TABLE  OF  CASES. 


liii 


(The  references  are  to  the  pages.) 


Silvain   v.   Benson— 123. 

Sim  v.  Edenborn — 445. 

Simmons  Creek  Coal  Co.  v.  Doran 
—126. 

Simon  v.  Weaver— 176,  337,  339,  358. 

Simons  v.  Vulcan  Oil  &  Min.  Co. — 
22,  181,  19S,  206,  207,  224,  225,  227, 
230,  306,  307,  336,  361,  362,  399, 
425,  538,  540. 

Simpson   v.   Lord   Howden — 106. 

Sims  v.  Eiland— 376,  378. 

Singer  Mfg.  Co.  v.  Peck— 586. 

Skegness  &  St.  Leonard's  Tramways 
Co.,  In  re— 165,  166. 

Skelton's  Case — 471,  476. 

Slater  Trust  Co.  v.  Gardiner — 425. 

Slattery  v.  Schwannecke — 128. 

Slattery  v.  St.  Louis  &  N.  O.  Transp. 
Co.— 119,  353. 

Sleigh  v.  Glasgow  &  Transvaal  Op- 
tions, Ltd.— 391,  442,  443,  466. 

Slide  &  Spur  Gold  Mines  v.  Sey- 
mour— 70. 

Slobodinsky,  Re— 127. 

Slocum  v.  Head — 583. 

Smith's  Case— 382,  398,  441,  471, 
475. 

Smith   v.    Bolles— 496. 

Smith  v.  Bowker  Torrey  Co. — 116. 

Smith  v.  Chadwick— 218,  268,  362, 
369,  371,  372,  373,  374,  381,  386, 
397,  398,  401,  404,  405,  420,  421, 
423,  424,  428,  460,  461. 

Smith  v.  Clench — 420. 

Smith  v.  Duffy^99,  500. 

Smith  v.  First  Nat'l  Bk.— 138. 

Smith  v.  Kellogg— 132. 

Smith  v.  Land  &  House  Property 
Corp.— 372. 

Smith  v.  New  Hartford  Water  Co. 
—155. 


Smith  v.  Ogilvie— 201. 

Smith  v.  Packard  Co.— 378. 

Smith  v.  Parker— 81,  82,  93,  97,  98, 

130,  132. 

Smith  v.  Reese  River  Co.— 382,  458. 
Smith  v.  So.  Bldg.  &  Loan  Ass'n— 

478,  479. 
Smith  v.  Tallassee,  etc.,  Plank-Road 

Co.— 479. 

Smith  v.  Texas  &  N.  O.  R.  Co.— 138. 
Snider  v.  McAtee — 460. 
Snider's  Sons  Co.  v.  Troy — 583. 
Snow  v.  Thompson — 130. 
Snyder  v.  Partridge — 128. 
Snyder  v.  Stemmons — 376. 
Society  for  Illustration  of  Practical 

Knowledge  v.  Abbott— 2,  233,  335. 
Solomon  v.  Bates — 380. 
Sondheimer   v.   Graeser — 126. 
Sortore  v.  Scott— 352. 
South  Durham  Iron  Co.  v.  Shaw — 

223. 
South   of   England   Natural    Gas   &. 

Petroleum  Co.,  Ltd.,  In  re — 390r 

391,  429. 
South   Joplin    Land   Co.   v.   Case — 

8,  9,  10,  20,  23,  25,  26,  189,  206, 

506. 
South  Missouri  Pine  Lumber  Co.  v. 

Crommer — 6,    8,   9,    10,   350,   506, 

512. 
Southern  Hardwood  Lumber  Co.  v. 

Scott— 155. 
Southern  Ins.  Co.  v.  Milligan — 413, 

444. 
Southern  States  F.  &  C.  Ins.  Co.  v. 

Cromartie — 367. 
Southern  States  F.  &  C.  Ins.  Co.  v. 

DeLong — 443,  472. 
Southern  States  F.  &  C.  Ins.  Co.  v. 

Wilmer  Stoves  Co.— 382. 


liv 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


Southern  Tobacco  Co.  v.  Armstrong 

-478. 

Spackman  v.  Lattimore — 403. 
Spangler  Brewing  Co.   v.  McHenry 

—314. 

Spartali,  Ex  parte — 466. 
Spaulding      v.      North     Milwaukee 

Town  Site  Co.— 171,  200,  204,  208, 

220,   224,  283,  289,   303,  493,  535, 

537,  539. 

Spead  v.  Tomlinson — 378. 
Spier  v.  Hyde— 52,  63. 
Spiller   v.   Paris   Skating  Rink  Co. 

—81,  98,  102. 

Spotten  v.  De  Freest — 438,  495. 
Spottiswoode's  Case — 561,  562,  564. 
Spring    Garden    Bank    v.    Hulings 

Lumber  Co.— 138. 
Spring  Valley  Water  Works  v.  San 

Francisco — 137. 
Sproat  v.  Porter— 168,  566. 
Squiers   v.   Thompson — 354,  437. 
Stainsby    v.    Frazer    Metallic    Life 

Boat  Co.— 81,  113. 
Standard  Printing  Co.  v.  Democrat 

Pub.  Co.— 114. 
Stanley    v.    Chester    &    Birkenhead 

Ry.  Co.— 103, 104,  113. 
Stanley  v.  Luse— 219,  231,  232,  297, 

319,  320. 
Stanton  v.  N.  Y.  &  E.  R.  R.  Co.— 

67,  80,  82,   89. 
Star  Corn  Millers'  Soc.  v.  Moore — 

98,  130. 
Starrett  v.  Rockland,  etc.,  Ins.  Co. 

—85. 
State  v.   Jefferson  Turnpike  Co. — 

407. 
State  ex  rel.  Hadley  v.  People's  U. 

S.  Bank— 75,  81. 
State  ex  rel.  Moore  v.  Manhattan 

Verde  Co.— 163. 


State  ex  rel.  Morton  v.  Timken — 33. 

State  Bank  of  Indiana  v.  Cook — 409, 
412,  413,  449. 

State  Bank  of  Indiana  v.  Gates — 
443,  444. 

State  Bank  of  Indiana  v.  Mentzer — 
451. 

State  Bank  of  Iowa  Falls  v.  Hawk- 
eye  Gold  Dredging  Co. — 80,  97. 

State  Fire  Ins.  Co.,  In  re— 78. 

Steely  v.  Texas  Imp.  Co.— 86. 

Steinmeyer   v.   Steinmeyer— 129. 

Stephany  v.  Marsden — 292. 

Stern  v.  McKee — 571. 

Stevens  v.  Ambler — 572,  573. 

Stevens  v.  Borough  of  Merchant- 
ville— 137. 

Stevens  v.  Episcopal  Church  His- 
tory Co. — 163. 

Stevens  v.  Hoare— 375,  390,  392,  393, 
394,  497. 

Stevenson,   Ex  parte — 475. 

Stevenson  v.  Dubuque  L.  &  L.  Min. 
Co.— 74. 

Stewart's  Case— 465,  466,  468,  571. 

Stewart  v.   Austin — 446,  571,   575. 

Stewart  v.  Lehigh  Valley  R.  R.  Co. 
—205. 

Stewart  v.  Norman — 122. 

Stewart  v.  Rutherford — 441. 

Stewart  v.  St.  L.  Ft.  S.  &  W.  R. 
Co.— 23,  189,  205,  217,  228,  234, 
266. 

Stickney  v.  Buckel— 152,  161. 

Stickney    v.    Jordan — 496. 

Stilwell  v.  Spokane  Alarm  Co. — 
166. 

Stocker  v.  Wedderburn — 57. 

Stocks,  Ex  parte— 560,  561,  562. 

Stockton  v.  Anderson — 349. 

Stone  v.  City  &  County  Bank — 474. 

Stone  v.  Fox  Machine  Co. — 114. 


TABLE   OF  CASES. 


lv 


(The  references  are  to  the  pages.) 


Stone  v.  Great  Western  Oil  Co. — 

131. 
Stoney  Creek  Woolen  Co.  v.  Smal- 

ley— 186,  349,  361,  399,  400,  511. 
Storey,  Ex  parte — See  Re  The  Len- 
nox Pub.  Co. — 406. 
Stout  v.  Zulick— 583,  584. 
Stowe  v.  Flagg— 32,  77,  580. 
Strasburg  R.  R.  Co.  v.  Echternacht 

—88,  132. 
Stratford  Fuel,  Ice  C.  &  C.  Co.  v. 

Mooney— 9,  203,  206,  305,  351,  539. 
Stratton's     Independence,     Ltd.     v. 

Dines— 233,    234,    235,    238,    251, 

372,  486,  496. 
Stratton  Massachusetts  Gold  Mines 

Co.  v.  Stratton — 233. 
Strause  v.  Richmond  Woodworking 

Co.— 142,  146. 
Streator  Ind.  Tel.  Co.  v.  Continental 

Tel.  Const.  Co. — 113. 
Strickland  v.  National  Salt  Co. — 33. 
Stroud  v.  Lawson — 358. 
Studley,  Ex   parte — 561. 
Stufflebeam  v.  De  Lashmutt — 477. 
Stupart  v.  Arrowsmith — 575,  577. 
Sugg  &  Co.,  Ltd.  v.  Hill— 146. 
Sullivan  v.  Detroit  Y.  &  A.  A.  Ry. 

Co.— 75,  127,  168. 
Sullivan  v.  Mitcalfe— 391,  392,  394, 

395. 
Summerlin  v.   Fronteriza   Sil.  Min. 

&  Mill.  Co.— 39. 
Sumner-May     Hardware     Co.      v. 

Scally— 74. 
Sumter  Tobacco  Warehouse  Co.  v. 

Phoenix  Assurance  Co. — 136. 
Sun  Dance  Gold  Mining  Co.  v.  Frost 

—528. 
Sunlight  Incandescent  Lamp  Co.,  In 

re—184. 
Swan  v.  Mathre — 443. 


Swarthmore  Lumber  Co.  v.  Parks — 

130,  434. 
Swartout  v.  Michigan  Air  Line  R. 

R.  Co.— 87. 
Swift  v.  Smith— 293. 
Swing  v.  Empire  Lumber  Co. — 119. 
Swisshelm  v.  Swissvale  Laundry  Co. 

—98,  102. 

Sylvester  v.  McCuaig— 580. 
Symmes  v.   Union  Trust  Co. — 555. 
Syracuse,  Chenango  &  N.  Y.  R.  R. 

Co.,  In  re— 284. 
Syracuse,  Phoenix  &  O.  R.  R.  Co. 

v.  Gere— 123,  134. 

T. 

Taite's   Case — 470. 

Talmadge  v.  Sanitary  Security  Co. 

—382,  406,  441. 
Tanner's  Case — 561. 
Tanner  v.  Nichols — 480. 
Tanner  v.  Sinaloa  Land  &  Fruit  Co. 

—76,   78,   89,   155,   156,   157,   158, 

538. 

Tascher  v.  Timerman — 41. 
Taussig   v.    St.   Louis   &   Kirkwood 

Ry.  Co.— 165. 
Taylor    v.    Chichester   &    Midhurst 

Ry.  Co.— 103. 
Taylor  v.  Crowland  Gas  &  Coke  Co. 

—78. 

Taylor  v.  Holmes — 341. 
Teachout  v.  Van  Hoesen — 399,  400, 

436,  458. 
Teagarden  v.  Godley  Lumber  Co. — 

129. 
Tecumseh  National  Bank  v.   Saun- 

ders — 119. 
Teeple  v.   Hawkeye  Gold  Dredging 

Co.— 90,  111,  166. 
Tegarden   Bros.    v.    Big   Star   Zinc 


Ivi 


TABLE    OF   CASES. 


(The  references  are  to  the  pages.) 


Co.— 17,  19,  20,  22,  171,  172,  177, 

224,  302,  317,  350,  511. 
Telegraph,  The,  v.  Loetscher — 4,  6, 

8,  18,  180,  290,  328,  330. 
Tennent  v.  City  of  Glasgow  Bank — 

474. 
Tennessee   Automatic   Lighting   Co. 

v.  Massey— 583,  584,  586. 
Terrell's    Case— 166. 
Terrell  v.  Hutton— 166. 
Terwilliger  v.  Great  Western  Tele- 
graph Co. — 40. 
Texas    Loan    Agency    v.    Hunter — 

126. 

Texas  West.  Ry.  Co.  v.  Gentry — 89. 
Thames  Nav.  Co.  v.  Reid — 8,  10,  12, 

13,  140,  142,  143,  174,  527. 
Theys,    Ex   parte— 179,   310,    312. 
Thigpen  v.  Miss.  Cent.  R.  R.  Co. — 

480. 
Third  Ward  Bldg.  Ass'n  v.  Lotze — 

157,  158,  165. 
Thistle  v.  Jones — 83. 
Thompson  v.  Hardy — 355,  450. 
Thomson  v.  Feeley — 140,  142. 
Thomson  v.  Lord  Clanmorris — 375. 
Thorn    v.     Volunteer     St.     Gregory 

Hospital— 119,  126. 
Thorpe  v.  Pennock  Mercantile  Co. — 

116,  119. 
Thrasher   v.    Pike   County    R.    R. — 

132. 

Thurber  v.  Crump — 63. 
Tiffany  v.  Hess — 352. 
Tift  v.  Quaker  City  National  Bank 

—78,  81,  95,  96,  109,  111,  120,  161. 
Tilleard,  In  re — 166. 
Tilleny  v.   Wolverton — 220. 
Tilson  v.  Warwick  Gas  Light  Co.— 

79,  156. 

Tindle  v.  Birkett— 299. 
Tinker  v.  Kier — 419,  421,  427. 


Tinnevelly  Sugar  Refining  Co.,  Ltd. 
v.  Mirrlees,  etc.,  Co.,  Ltd. — 133. 

Titus  v.  Catawissa  R.  R. — 89,  101. 

Tobias    v.    Wierck — 582. 

Todd   v.   Millen — 403. 

Toledo  &  Ind.  Traction  Co.  v.  Toledo 
&  Chicago  Interurban  St.  Ry.  Co. 
—137. 

Tompkins  v.  Sperry,  Jones  &  Co. — 
39,  233,  234,  235,^237,  242,  252, 
335,  336,  343,  430,  432,  451,  523. 

Tonica  &  P.  R.  R.  Co.  v.  McNeely— 
131. 

Tooker  v.  Nat'l  Sugar  Ref.  Co. — 33, 
191,  205,  218,  228,  292,  307,  309, 
311,  313,  465. 

Torrey  v.  Toledo  Portland  Cement 
Co.— 20,  185,  219,  273,  388,  455. 

Touche  v.  Metropolitan  Ry.  Ware- 
housing Co.— 76,  80,  98,  142,  155, 
156. 

Townsend  v.  Felthousen — 398. 

Traill   v.   Baring — 419. 

Travis  v.  Travis— 13,  463,  514,  528. 

Treasurer  v.  Commercial  Mining  Co. 
—59. 

Trenton  Passenger  Ry.  Co.  v.  Wil- 
son—39. 

Trimble  v.  American  Sugar  Refin- 
ing Co. — 284. 

Trimble  v.  Reid— 376,  380,  382. 

Troy  &  Boston  R.  R.  Co.  v.  Tibbitts 
—87. 

Trustee  of  Gonville  v.  Patent  Cara- 
mel Co.,  Ltd.— 118. 

Trustees  of  Vincennes  University  v. 
Indiana— 137. 

Tryber  v.  Girard  Creamery  Co. — 97, 
112,  116. 

Tuccillo   v.    Pittelli— 581,   585. 

Turley  v.  Thomas— 59,  60,  61. 


TABLE   OF  CASES. 


Ivii 


(The  references  are  to  the  pages.) 


Turner  v.  Fidelity  Loan  Concern — 

89. 
Turner  v.   Grangers'   L.  &  H.   Ins. 

Co.-^77,  478. 
Turner  v.  Markham — 233,  235,  253, 

264. 
Turnpike  Road  Co.  v.  McConaby — 

See  Centre  &  K.  Turnpike  Road 

Co.  v.  McConaby. 
Tuttle  v.  George  H.  Tuttle  Co.— 79, 

95,  101. 
Twin  Creek,  etc.,  Turnpike  Road  Co. 

v.  Lancaster— 88,   132. 
Twin    Lick    Oil    Co.    v.    Marbury — 

293,  294. 
Twycross  v.   Grant — 3,  4,   6,   7,  18, 

23,  26,  29,  183,  203,  223,  390,  391, 

392,   410,  441,  456,  457,  491,  497, 

499,  501. 
Tygert-Allen  Fertilizer  Co.  v.  J.  E. 

Tygert   Co.— 109,    113. 
Tyler  v.  Savage — 453. 
Tyrrell  v.  Bank  of  London — 3,  11, 

136,  179,   196,  305,  325,  329,  483, 

516,  517. 

u. 

Union  Bank  v.  Campbell — 128. 
Union  Nat'l  Bank  v.  Hunt — 160. 
Union  Pacific  Ry.  Co.  v.  Barnes — 

377. 
United  States  Steel  Corporation  v. 

Hodge— 205,   220,    346. 
United  vStates  Vinegar  Co.  v.  Foeh- 

renbach — 124. 
United  States  Vinegar  Co.  v.  Schle- 

gel— 124. 
United  States  Wood  Preserving  Co. 

v.  Lawrence — 586. 
Upshur  v.  Briscoe — 299. 
Upton  v.  Corser— 581,  585,  587. 


Upton   v.   Engelhart — 441,  459,  465, 

472,   477,   478. 

Upton    v.    Hansborough — 473. 
Upton  v.  Tribilcoek— 465,  473,  477, 

478. 
Urner  v.  Sollenberger — 211,  231,  319, 

346,  400,  472,  475. 
Utah  Black  Marble  Co.  v.  American 

Marble  &  Onyx  Co.— 118,  126. 
Utah  Optical  Co.  v.  Keith— 76. 

V. 

Vail  v.  Reynolds— 355,  450,  495. 

Valk  v.  Crandall— 138. 

Vane  v.  Cobbold — 407. 

Vanneman   v.   Young — 584. 

Van    Noy    v.    Central    Union    Fire 

Ins.  Co.— 75,  82,  98,  441. 
Van   Schaick   v.   Third   Ave.   R.   R. 

Co.— 92,  98,  101,  115. 
Van   Slochem   v.   Villard— 398,   399, 

400,  415,  417. 

Van  Vlieden  v.  Welles — 146. 
Varnum  v.  Thruston — 48. 
Vauxhall   Bridge  Co.   v.   Spencer — 

106. 
Vermont  Central  R.  R.  Co.  v.  Clayes 

—134. 

Vickers,    Ex  parte— 383. 
Vincennes   University   v.    Indiana — 

See  Trustees  of  Vincennes  Univer- 
sity v.  Indiana. 
Vincent  v.   Corbett — 379. 
Virginia   Land   Co.    v.    Haupt — 218, 

388,  401,  447,  450,   470,  471,  472. 
Vogeler  v.  Punch — 310,  338. 
Vollans  v.  Fletcher — 567. 
Volney  v.  Nixon — 33,  464. 
Vreeland   v.   N.   J.    Stone  Co. — 397, 

417,  441,  446,  450,  453,  479. 


Iviii 


TABLE    OF   CASES. 


(The  references  ar6  to  the  pages.) 


w. 

Waddy  Blue  Grass  Cr.  Co.  v.  Davis 

&  Rankin  Bldg.  &  Mfg.  Co.— 126. 
Wainwright's   Case— 382,    404,    405, 

407. 
Wait   v.   Kern   River   Min.   Mill.   & 

Dev.  Co.— 59,  63. 
Wakeman  v.  Dalley— 369,  373,  378, 

428. 
Waldo  v.  Chicago,  St.  Paul  &  Fond 

du  Lac  R.  R.  Co. — 441. 
Walker's   Case — 476. 
Walker    v.    Anglo-American    Mort- 
gage  &   Trust   Co.— 12,   368,   388, 

402,  404,  410,  441. 
Walker  v.  Mobile  &  Ohio  R.  R.  Co. 

—384,  397,  417. 
Walker  v.  Pike  Co.  Land  Co.— 171, 

307. 

Walker  v.  Russell— 397,  462,  500. 
Wall   v.   Mines— 136. 
Wall  v.  Niagara  Min.  &  Sm.  Co. — 

76,  79,  84,  89,  90,  93,  98. 
Wallace's  Case — See  In  re  Scottish 

Petroleum  Co.,  Ltd. 
Wallace   v.    Bacon — 477. 
Wallace  v.  Long  Island  R.  R.  Co. — 

346. 

Walstab,  Ex  parte— 565. 
Walstab  v.   Spottiswoode — 567,  568, 

570,  571,  573,  574. 
Ward   v.    Brigham — 586. 
Ward  v.  Lord  Londesborough — 569. 
Ward  v.  Smith— 284,  358. 
Warfield  v.  Clark— 376. 
Waring  &  Gillow,  Ltd.  v.  Thompson 

—65. 
Warner  v.  Benjamin— 415,  417,  432, 

460,  462,  496,  499. 
Warner  v.  Hall— 128. 
Warner  v.  Wood — 62. 


Warner,  etc.,  Engineering  Co.,  Ltd. 

v.  Kilburn— 383,  572. 
Warren  v.  Para  Rubber  Shoe  Co. — 

351,  354. 
Warren-Ehret   Co.    v.    Franklinville 

Ice  Mfg.  Co.— 196. 
Washington  &  Idaho  R.   R.   Co.  v. 

Coeur  D'Alene  Ry.  &  Nav.  Co. — 

137. 
Wasser  v.  Western  Land  Securities 

Co. — 82.  * 

Waterloo  Life,  etc.,  Assurance  Co., 

The,  Re— 223. 
Waterman's  Appeal — 116. 
Waters  v.  Horace  Waters  &  Co. — 

40. 
Water  Valley  Mfg.  Co.  v.  Seaman — 

479. 

Watkins  v.  Delahunty— 538. 
Watkins  v.  Mills— 21,  233,  254,  255, 

265,  266. 

Watson,   Ex   parte — 120. 
Watson  v.  Bayliss— 64,  66. 
Watson  v.  Crandall — 366. 
Watson  v.  Donald — 567,  570. 
Watson  v.  Earl  of  Charlemont — 445, 

573. 

Watson  v.  Gugino — 35,  132. 
Watson  v.  Jones — 376,  380. 
Watts    v.    Bucknall— 390,   391,    393. 
Watts  v.   Salter— 568. 
Weatherbe  v.  Whitney— 358,  497. 
Weatherford   M.   W.   &  N.   W.   Ry. 

Co.  v.  Granger— 75,  76,  79,  82,  84, 

91,  98,  107,  127,  140,  141,  152,  155, 

156,  166. 

Weathersby  v.  Texas  &  Ohio  Lum- 
ber Co.— 75,  79,  90,  111. 
Weaver  v.   Barden — 317. 
Webb   v.    Direct   London   &   Ports- 
mouth Ry.  Co. — 103. 
Webb  v.  Rockefeller— 365. 


TABLE  OF  CASES. 


(The  references  are  to  the  pages.) 


Weber  v.  Nichols— 191,  341. 

Webster's  Case — 466,  571. 

Webster  v.  Webster  Refining  Co.  of 

Okmulgee — 33. 
Wechselberg  v.  Flour  City  National 

Bank— 585,  586. 
Weeks  v.  Currier — 378. 
Weems  v.  Georgia  Midland  &  Gulf 

R.  R.  Co.— 369,  384,  418. 
Weir  v.  Barnett— 369. 
Weir  v.  Bell— 369. 
Weir  Furnace  Co.  v.  Bodwell — 581. 
Weisiger  v.  Richmond  Ice  Machine 

Co.— 460,  473,  478. 
Weiss  v.  Arnold  Print  Works — 74. 
Wells  v.  Cook— 367.  , 
Wells  v.  Fay  &  Egan  Co.— 140,  141, 

147. 
Wenstrom  Consol.  Dynamo  &  Motor 

Co.  v.  Purnell— 384,  404,  413. 
Werderman     v.     Societg     G6n6ral§ 

D'Electricite— 117. 
Wert  v.  Crawfordsville,  etc.,  Turn- 
pike Co.— 480. 
West,  Ex  parte — 468. 
West  v.  Camden — 37,  38. 
West  v.  Huiskamp — 39. 
West  End  Real  Estate  Co.  v.  Clai- 

borne— 217,  401,  410,  450,  460,  462, 

465,  466,  467,  469,  470. 
West  End  Real  Estate  Co.  v.  Nash 

—217,  401,  447,  450,  465,  467,  470, 

571. 
Western  Bank  of  Scotland  v.  Addle 

—369,  370,  374,  380,  441,  448. 
Western  Development  Co.  v.  Emery 

—130. 
Western  Investment  Co.  v.  Davis — 

145,   583,   584. 
Western    Screw   &   Manufg  Co.   v. 

Cousley— 77,  96. 


Western    States    Life    Ins.    Co.    v. 

Lockwood — 160. 
Westmoreland  Green  &  Blue  Slate 

Co.,  In  re — See  Eland's  Case. 
Weston's  Case — 179,  488. 
West  Point  Foundry  Ass'n  v.  Brown 

—587. 
West  Point  Tel.  &  Tel.  Co.  v.  Rose 

—158. 
Whaley  Bridge  Calico  Printing  Co. 

v.   Green— 4,   6,   7,  171,   178,  328, 

514. 

Wheeler  v.  Fradd— 142,  168. 
Wheeler  v.  Thayer — 87. 
Wheeling  Creek  Gas,  Coal  &  Coke 

Co.     v.    Elder — See    Gas    Co.    v. 

Elder. 
Whetstone   v.   Crane   Bros.    Manuf. 

Co.— 77,  140. 
White  v.   American  Nat.   Life  Ins. 

Co.— 465,  466,  469. 
White   v.   Hayman — 391. 
White  v.  Kahn— 78,  87,  123. 
White   v.   Robinson — 445. 
White  v.  Westport  Cotton  Mfg.  Co. 

—90. 

White  v.  Wood— 53. 
Whitehouse's   Case — 465. 
Whiteley's  Case — 475. 
White  Mountains  R.  R.  Co.  v.  East- 
man—123,  408. 
White    Oak    Grove   Benev.    Soc.   v. 

Murray— 138. 

Whiting  v.  Price— 460,  495,  499. 
Whiting's  Adm.  v.  Crandall — 366. 
Whiting  &  Sons  Co.  v.  Barton — 136. 
Whitney  v.   Allaire — 469,  495. 
Whitney  v.  Fairbanks— 264,  338,  341, 

358. 

Whitney  v.  Wyman — 97,  145. 
Whitten  v.  Jenkins— 128. 
Whittlesey  v.  Frantz— 410,  411. 


TABLE    OF    CASES. 


(The  references  are  to  the  pages.) 


Whitwell   v.   Warner — 582. 

Wiano  Land  &  Improvement  Co.  v. 

Webster— 198,  307. 
Wiegand   v.    Albert   Lewis   Lumber 

&  Mfg.  Co.— 187,  210,  317. 
Wight  v.  Shelby  R.  R.  Co.— 123,  461, 

479. 
Wilbur  v.  N.  Y.  Elec.  Const.  Co.— 

113,  120. 

Wilde   v.    Gibson— 383. 
Wiley  v.  Borough  of  Towanda — 132, 

141. 

Wilkes  v.  Knight^t78. 
Wilkins   v.   Davies — 537. 
Wilkins  v.   Roebuck— 89. 
Wilkinson's  Case — 466,  571. 
Willard  v.  Key— 376,  377,  378. 
Willard  v.  Wood— 294. 
Willey  v.  Parratt— 568. 
William    Allen    &   Co.    v.    Somerset 

Hotel  Co.— 91,  96,  97. 
William   Cameron   &   Co.    v.   True- 
heart— 138. 
Williams,   Ex  parte— 163,   209,  217, 

221. 
Williams  v.  Citizen's  Enterprise  Co. 

—87. 

Williams  v.  Colby — 116. 
Williams    v.    Evans — 33. 
Williams  v.  Hewitt— 584,  585. 
Williams  v.  McFadden — 495. 
Williams  v.  Montgomery — 40,  62. 
Williams  v.  Page— 575,  576,  577. 
Williams  v.  Pigatt— 562. 
Williams   v.    St.    George's   Harbour 

Co.— 94. 
Williams  v.  Salmond— 566,  575,  576, 

577. 
Williamson  v.  Krohn— 33,  58,  59,  62, 

282,  312,  315,  338,  346,  438,   464, 

470,  527. 
Willis  v.  Vallette— 128. 


Willock  v.  Dilworth— 12,  174. 
Wills  v.  Nehalem  Coal  Co.— 17,  21, 

172,   173,   181,  186,  188,   189,  191, 

200,    202,   206,   211,   213,   222,   223. 

247,   285,  292,   293,   294,   297,   305, 

307,  309,  310,  311,  312,  313,  327, 

329,    336,   337,   338,   339,   342,   343, 

353,  388,  409,  428,  429,  430,  439, 

488. 

Wilson  v.  Curzon — 551,  564. 
Wilson  v.  Hotchkiss— 368,  389,  402, 

407,  537. 
Wilson   v.    Hundley— 409,   437,   450, 

465,  468,  469. 

Wilson   v.   Meyer — 414,   444. 
Wilson    v.    Stanhope — 575. 
Wilson  v.  Trenton,  etc.,  R.  R.  Co. — 

39. 

Wilson  v.  United  States — 504. 
Wilson  v.  Welch— 337. 
Wilson  Coal  Co.  v.  United  States— 

126. 
Wimbledon   Olympia,  Ltd.,  In  re — 

391. 

Windram  v.  French — 417. 
Windsor  Hotel  Co.  v.   Schenck — 87. 
Wineburgh  v.  United  States  Steam, 

etc.,  Co.— 351. 
Wingo  v.  First  Nat'l  Bank  of  Pon- 

totoc — 467. 

Winsor  v.  Bailey— 542,  358. 
Winston  v.   Brooks — 132. 
Winters  v.  Hub  Mining  Co. — 74. 
Wiser  v.   Lawler— 9,  362,  388,   419, 

420,  506,  518. 

Witmer   v.    Schlatter — 146. 
Wontner  v.  Shairp — 407,  467. 
Wood  v.  Argyll— 143,  560,  562. 
Wood  v.  Whelen — 94. 
Woodbury    Heights     Land    Co.     v. 

Londenslager— 7,  19,   24,  25,  181, 


TABLE   OF  CASES. 


1x1 


(The  references  are  to  the-pages.) 


187,  193,  194,   202,  219,  221,  224, 

252,  399,  400,  541,  543. 
Wood  Harvester  Co.  v.  Jefferson — 

122,  123,  442. 
Woods  Motor  Vehicle  Co.  v.  Brady 

—131,  571. 
Woodstock  Iron  Co.  v.  Richmond  & 

D.    Extension    Co.— 121. 
Woodward  v.  San  Antonio  Traction 

Co.— 127. 

Woodward  v.  Thacher — 496. 
Woodward    v.    Woodward — 282. 
Woolman  v.  Wirtsbaugh — 495. 
Woolmer  v.  Toby — 404. 
Worth,  Ex  parte — 364,  442,  443,  444. 
Worthlngton,   In   re— 31,    161. 
Wright's  Case-^07,  474,  476. 
Wright    v.    St.    Louis    Sugar    Co.— 

107. 

Wright  Bros.  v.  Merchants  &  Plant- 
ers Packet  Co.— 87,  416. 
Wyatt    v.    Metropolitan    Board    of 

Works— 165,  166. 
Wyckoff  v.  Vicary— 137. 
Wyld  v.  Hopkins— 537,  561. 
Wyoming   Valley   Ice   Co.,   In   re — 

187,  210,  316. 

Y. 


17,  22,  23,  24,  25,  26,  171,  173,  175, 
176,  177,  178,  179,  186,  188,  189, 
195,  196,  200,  202,  206,  281,  289, 
305,  309,  328,  336,  337,  409,  514. 

Yeiser  v.  United  States  Board  & 
Paper  Co.— 6,  12,  18,  20,  25,  28, 
171,  172,  173,  181,  185,  193,  200, 
308,  310. 

Yonkers   Gazette  Co.    v.   Jones — 85, 

122,  123,  408. 

Yonkers  Gazette  Co.  v.  Taylor — 88, 

132,  572. 

York  Mfg.  Co.   v.   Brewster— 126. 
York  Park  Bldg.  Ass'n  v.  Barnes — 

123,  408. 

Young  v.  Drake — 344. 
Young  Reversible  Lock  Nut  Co.  v. 
Young  Lock  Nut  Co.— 126. 

z. 

Zabel  v.  New  State  Tel.  Co. — 408. 
Zang  v.  Adams — 401,  449,  450,  459, 

472. 

Zeigler  v.  Valley  Coal  Co. — 125. 
Ziemer  v.  C.   G.   Bretting  Mfg.  Co. 

—116,  119,  121. 
Zinc   Carbonate  Co.   v.   First   Nat'l 

Bank— 308,  353,  356,  539. 


Yale  Gas  Stove  Co.  v.  Wilcox— 4,  6, 


THE  LAW  OF  PROMOTERS. 


CHAPTER  I. 

OF  PROMOTERS  GENERALLY. 

Section     1.  Introductory. 

2.  Judicial  acceptance  of  the  term  "promoter." 

3.  Definitions  of  the  term. 

4.  Circumstances  that  give  rise  to  the   relation. 

5.  Sharing  promoter's  profits. 

6.  Carrying  on  promotion  by  agents. 

7. Acting  as  vendor,  vendor's  agent,  etc. 

8.  Bankers  and  solicitors,  not  promoters. 

9.  Subscribers  for  shares,  not  promoters. 

10.  Promoter's  partners  as  promoters. 

11.  Corporations  as  promoters. 

12.  Use  of  the  word  promoter  in  America. 

13.  Meaning  and  effect  of  the  term. 

14.  Fiduciary  relation. 

15.  Inception  of  the  relation. 

16.  The  same  subject. — Purchase  of  property  with  vfew  to  resale 

to  corporation. 

17.  The    same    subject. — Taking    step    in    organization    of    cor- 
poration. 

18.  The  same  subject. — An  illustrative  case. 

19.  Termination  of  the  relation. 

§  i.  Introductory. 

Some  preliminary  steps  in  the  organization  of  a  corporation 
must  necessarily  be  taken  before  a  certificate  of  incorporation  is 
prepared  and  signed,  and  further  steps  are  necessary  before  the 

(1) 


2  THE  LAW  OF  PROMOTERS. 

company  can  have  directors,  officers,  or  agents,  capable  of  rep- 
resenting and  acting  for  it.  A  corporation  might,  it  is  true, 
be  organized  without  any  action  being  taken  prior  to  the  signing 
and  filing  of  the  certificate  of  incorporation,  other  than  the  prep- 
aration thereof.  The  further  steps  necessary  for  the  complete 
legal  organization  of  the  company  might  be  carried  on  by  the 
incorporators,  and  all  questions  as  to  the  business  to  be  conducted 
by  the  company,  the  properties  to  be  acquired  by  it,  and  the 
method  of  raising  the  necessary  capital,  could  be  left  to  the 
future  determination  of  the  directors  when  qualified,  fn  practice, 
however,  a  corporation  is  organized  for  the  purpose  of  carrying 
•on  some  particular  business,  and  the  scope  of  this  business,  the 
properties  to  be  acquired,  the  method  of  raising  capital,  and  other 
matters,  are  agreed  upon  before  any  move  toward  the  legal 
organization  of  the  corporation  is  made.  The  negotiations  rel- 
ative to  the  molding  of  the  contemplated  company  are  therefore 
carried  on  by  persons  who,  whatever  their  subsequent  relation  to 
the  corporation,  are,  at  the  time,  neither  directors,  officers,  agents, 
nor  even  incorporators  of  the  company.  These  preliminary  ne- 
gotiations involve  matters  of  great  importance  to  the  future 
corporation  and  its  stockholders,  and  many  and  difficult  questions 
of  law  result  therefrom.  A  designation  for  the  persons  by 
whom  these  negotiations  are  carried  on  is  a  matter  of  necessity. 
The  term  now  in  general  use  is  "  promoter." 

§  2.  Judicial  acceptance  of  the  term  promoter. 

The  complete  judicial  acceptance  of  this  term  "  promoter  "  is 
a,  matter  of  comparatively  recent  date.  In  some  of  the  early 
•cases,  persons  engaged  in  the  formation  of  a  corporation  are 
spoken  of  as  its  "  projectors."  *  Other  cases  of  about  the  same 

1.  Blaln  v.  Agar,  (1826)  1  Sim.  2  Beav.  559;  Foss  v.  Harbottle, 
37,  5  L.  J.  Ch.  1;  Society  for  Prac-  (1843)  2  Hare  461,  489;  Edwards 
tlcal  Knowledge  v.  Abbott,  (1840)  T.  Grand  Junction  Ry.  Co.,  (1836) 


PROMOTERS  GENERALLY.  3 

period,  though  recognizing  the  obligations  flowing  therefrom, 
do  not  give  any  name  to  the  relation  in  which  such  persons  stand 
to  the  contemplated  company.2 

The  word  promoter,  while  undoubtedly  employed  in  common 
parlance  before  that  time,  does  not  seem  to  have  been  used  in  any 
reported  decision  until  after  itv  had  been  used,  and  for  the  pur- 
poses of  the  act  defined,  in  the  Joint  Stock  Companies  Act  of 


"  I  dislike  the  use  of  the  word  '  promoter,'  "  said  Lord  Jus- 
tice Cotton,  as  late  as  1887.4  The  word  had,  however,  been 
judicially  recognized  before  that  time,  even  in  the  House  of 
Lords.6 

Lord  Justice  Lindley  in  his  work  on  Companies  Law,  published 
in  1889,6  said,  "  There  has  been  considerable  discussion  with  ref- 
erence to  the  meaning  of  the  word  promoter,  and  also  with  refer- 
ence to  his  relation  to  the  company  he  is  endeavoring  to  form. 
The  word  itself  has  never  been  defined  ;  but  it  is  used  in  common 
parlance,  and  also  in  Section  38  of  the  Companies  act,  1867,  to 
denote  those  persons  who  bring  the  company  into  existence,  by 
taking  an  active  part  in  forming  it,  and  in  procuring  persons  to 

join  it  as  soon  as  it  is  technically  formed." 

/ 

1    Mylne    &    Cr.    650,    672,    7    Sim.  Hawkes,    (1855)   5  H.   L.  Gas.  331, 

337;     Preston    v.     Liverpool    Man-  856;    Caledonian,    etc.,    Ry.    Co.    v. 

Chester,  etc.,  Ry.  Co.,  (1851)  1  Sim.  Magistrates  of  Helensburgh,  (1856) 

N.  S.  586,  7  Eng.  Law  &  Eq.  124,  21  2  Macq.  391,  407,  2  Jur.  N.  S.  695  ; 

L.   J.  Ch.  N.   S.   61.  Tyrrell  v.  Bank  of  London,   (1862) 

2.  Hichens  v.  Congreve,  (1828)  4  10  H.  L.  Cas.  26,  11  Eng.  Rep.  934; 
Russ.  562;  same  v.  same,  (1829)  1  See  also  Reynell  v.  Lewis,    (1846) 
R.  &  M.  150;  same  v.  same,  (1831)  4  15  M.  &  W.  517,  528;  In  re  Anglo- 
Sim.  420,  427.  Greek   Steam   Co.,    (1866)    L.   R.   2 

3.  Stat.   7   and  8  Viet.,  Ch.   110,  Eq.   1,  35   Beav.  399;   Twycross   v. 
§    3.  Grant,  (1877)  L.  R.  2  C.  P.  D.  469. 

4.  Ladywell       Mining       Co.       v.          6.  Lindley    on    Companies    Law, 
Brookes,  L.  R.  35  Ch.  Div.  400,  411,  5th  ed.,  (1889)  346;  6th  ed.,  Vol.  1, 
17  Am.  &  Eng.  Corp.  Cas.  22.  p.  481. 

5.  Eastern    Counties   Ry.    Co.    v. 


THE  LAW  OF  PROMOTERS. 


§  3.  Definitions  of  the  term. 

The  term  promoter  is  not  one  of  precise,  inflexible  meaning,7 
and  is  hardly  capable  of  accurate  definition.8 

The  word  is  defined  in  the  English  Joint  Stock  Companies  Act 
of  1844  9  as  applying  "  to  every  person  acting  by  whatever  name 
in  the  forming  and  establishing  of  a  company  at  any  period  prior 
to  the  company  obtaining  a  certificate  of  complete  registration." 
The  word  is  here  defined  only  for  the  purposes  of  the  act,  and 
the  definition  is  inadequate  for  general  purposes. 

The  court  in  Whaley  Bridge  Calico  Printing  Co.  v.  Green  10 
aptly  says,  "  The  term  promoter  is  a  term  not  of  law,  but  of 
business,  usefully  summing  up  in  a  single  word  a  number  of 
business  operations  familiar  to  the  commercial  world  by  which 
a  company  is  generally  brought  into  existence." 

"  A  promoter,"  said  Chancellor  Pitney,11  in  the  recent  case  of 
Bigelow  v.  Old  Dominion  Copper,  etc.,  Co.,12  "  is  one  who  seeks 


7.  Ex-Mission  Land  &  Water  Co. 
v.   Flash,  97  Cal.   610,  625-626,  32 
Pac.  600,   604;   Old  Dominion  Cop- 
per, etc.,  Co.  v.  Bigelow,  203  Mass. 
159,  177,  89  N  E.  193,  40  L.  R.  A.  N. 
S.  314;  Emma  Silver  Mining  Co.  v. 
Lewis,  L.  R.  4  C.  P.  D.  396,  407. 

8.  First  Ave.  Land  Co.  v.  Hilde- 
brand,  103  Wis.  530,  79  N.  W.  753, 
citing  Alger  on  Promoters,   §  1. 

9.  Stat.    7    &    8    Victoria,    Chap. 
110,  §  3,  (Repealed  Stat.  25  and  26 
Victoria,  Ch.  89).     Quoted  in  Dick- 
erman  v.  Northern  Trust  Co.,   176 
U.  S.  181,  203,  20  Sup.  Ct.  311,  44 
L.    Ed.  423.   The  term   is  also   de- 
fined  in   The   Companies    (Consoli- 
dation) Act  of  1908,  8  Edward  VII, 
Chap.  69,  §  84,  subd.  5.    The  term  is 
used  in  The  Companies  Act  of  1867, 
30  &  31  Victoria,  Chap.  131,  §  38. 


10.  L.  R.  5  Q.  B.  D.  109,  111,  28  W. 
R.   351,    (1879).      (Quoted   in   Yale 
Gas  Stove  Co.  v.  Wilcox,  64  Conn. 
101,  119,  29  Atl.  303,  25  L.  R.  A.  90, 
42  Am.  St.  Rep.  159,  47  Am.  Eng. 
Corp.   Gas.   647;   The  Telegraph   v. 
Loetscher,    127    Iowa    383,    101    N. 
W.   773,  4   Am.   &   Eng.   Ann.   Cas. 
667;  Pitts  v.  Steele  Mercantile  Co., 
75  Mo.   App.   221,  226-227;    Second 
Nat'l     Bk.     v.     Greenville     Screw 
Point  Fence   Post  Co.,   23   Ohio  C. 
C.   274,   280).     To   the   effect   that 
the  term  is  one,  not  of  law,  but  of 
business,  see  Bigelow  v.  Old  Domin- 
ion Copper,  etc.,  Co.,  74  N.  J.  Eq. 
457,  501,  71  Atl.  153;   Twycross  v. 
Grant,  L.   R.   2  C.   P.   D.  469,  503. 

11.  Now  Associate  Justice  of  the 
United    States    Supreme    Court. 

12.  74  N.  J.  Eq.  457,  501,  71  AtL 
153. 


PROMOTERS  GENERALLY.  5 

opportunities  for  making  advantageous  purchases  and  profitable 
investments  in  industrial  or  other  enterprises,  who  interests  men 
of  means  in  such  a  project  when  found,  organizes  them  into  a 
corporation  for  the  purpose  of  *  taking  over '  the  project,  and 
attends  upon  the  newly-formed  company  until  it  is  fully  launched 
in  business.  He  may  be  stockholder,  director,  officer,  or  none  of 
these.  His  services  begin  before  the  company  is  formed,  and 
ordinarily  are  not  concluded  until  some  time  after  its  formation." 

The  Supreme  Court  of  Massachusetts,  considering  the  meaning 
of  the  term  in  a  subsequent  phase  of  the  same  litigation,13  said: 
"  In  a  comprehensive  sense  '  promoter '  includes  those  who  under- 
take to  form  a  corporation  and  to  procure  for  it  the  rights,  in- 
strumentalities and  capital  by  which  it  is  to  carry  out  the  pur- 
poses set  forth  in  its  charter,  and  to  establish  it  as  fully  able  to 
do  its  business.  Their  work  may  begin  long  before  the  organiza- 
tion of  the  corporation,  in  seeking  the  opening  for  a  venture  and 
projecting  a  plan  for  its  development,  and  may  continue  after 
the  incorporation  by  attracting  the  investment  of  capital  in  its 
securities  and  providing  it  with  the  commercial  breath  of  life." 

The  term  has  also  been  defined  14  as  meaning  "  A  person,  who, 
by  his  active  endeavors,  assists  in  procuring  the  formation  of  a 
company  and  the  subscription  of  its  shares.  *  *  *  *  The 
word  '  promoter '  has  no  technical  legal  meaning  and  applies  to 
any  person  who  takes  an  active  part  in  inducing  the  formation  of 
a  company,  whether  he  afterwards  becomes  connected  with  the 
company  or  not." 

Another  definition  frequently  quoted  15  defines  a  promoter  as 

13.  Old    Dominion    Copper,    etc.,  Quoted   in   Dickerman   v.   Northern 
Co.  v.  Bigelow,  203  Mass.  159,  177,  Trust   Co.,   176  U.    S.   181,   203,   20 
89  N.  E.  193,  40  L.  R.  A.  N.  S.  314.  Sup.  Ct.  311,    44  L.  Ed.  423 ;  Moore 

14.  Morawetz     on     Corporations,  v.   Warrior  Coal   &   Land  Co.,   178 
(2nd   ed.),    §   545.     Quoted   in   Ex-  Ala.     234,    59     So.    219;     Burbank 
Mission  Land  &  Water  Co.  v.  Flash,  v.     Dennis,    101    Cal.    90,    97,    35 
97  Cal.  610,  32  Pac.  600.  Pac.  444,  446;   Ex-Mission  Land  & 

15.  Cook  on  Corporations,  §  651.  Water  Co.    v.    Flash,   97   Cal.    610, 


THE  LAW  OF  PROMOTERS. 


"  A  person  who  brings  about  the  incorporation  and  organization 
of  a  corporation.  He  brings  together  the  persons  who  become 
interested  in  the  enterprise,  aids  in  procuring  subscriptions,  and 
sets  in  motion  the  machinery  which  leads  to  the  formation  of  the 
corporation  itself." 

§  4.  Circumstances  that  give  rise  to  the  relation. 

There  is  no  one  circumstance,  or  set  of  circumstances,  the  pres- 
ence or  absence  of  which  determines  the  existence  of  the  relation 
of  promoter  to  a  corporation. 

It  has  been  said  that  "  whether  a  person  is  or  is  not  a  promoter 
is  a  question  of  fact  and  not  of  law,  and  must  in  each  case  be 
determined  with  due  regard  to  all  the  circumstances."  16  The 


626,  32  Pac.  600,  604 ;  the  Telegraph 
v.  Loetscher,  127  Iowa  383,  101  N. 
W.  773,  4  Am.  &  Eng.  Ann.  Gas. 
667;  South  Mo.  Pine  Lumber  Co.  v. 
Crommer,  202  Mo.  504,  518,  101  S. 
W.  22,  26;  Brooker  v.  William  H. 
Thompson  Trust  Co.,  254  Mo.  125, 
162  S.  W.  187,  194 ;  See  v.  Heppen- 
heimer,  69  N.  J.  Eq.  36,  71,  61  Atl. 
843;  Hutchinson  v.  Simpson,  92  N. 
Y.  App.  Div.  382,  409,  87  N.  Y.  Supp. 
369,  (dissenting  opinion  of  Hatch, 
J.)  ;  Richlands  Oil  Co.  v.  Morriss, 
108  Va.  288,  294,  61  S.  E.  762,  764; 
Cox  v.  National  Coal  &  Oil  In- 
vestment Co.,  61  W.  Va.  291,  305,  56 
S.  E.  494,  500. 

Further  definitions  of  the  term 
promoter  may  be  found  in 
Yeiser  v.  TJ.  S.  Board  &  Paper  Co., 
107  Fed.  340,  344,  46  C.  C.  A. 
567,  52  L.  R.  A.  724 ;  Yale  Gas 
Stove  Co.  v.  Wilcox,  64  Conn.  101, 
119,  29  Atl.  303,  25  L.  R.  A.  90,  42 
Am.  St.  Rep.  159;  47  Am.  &  Eng. 
Corp.  Gas.  647;  McRee  v.  Quitman 


Oil  Co.,  —  Ga.  — ,  84  S.  E.  487; 
Hinkley  v.  Sac  Oil  &  Pipe  Line  Co., 
132  Iowa  396,  402,  107  N.  W.  629, 
631,  119  Am.  St.  R.  564;  Armstrong 
v.  Sun  Printing  &  Publishing  Ass'n, 
137  N.  Y.  App.  Div.  828,  830,  831, 122 
Supp.  531;  Bosher  v.  Richmond  & 
H.  Land  Co.,  89  Va.  455,  460,  16  S. 
E.  360,  362;  First  Avenue  Land  Co. 
v.  Hildebrand,  103  Wis.  530,  534,  79 
N.  W.  753,  754,  (citing  Alger  on 
Promoters,  §  1)  ;  Erlanger  v.  New 
Sombrero  Phosphate  Co.,  L.  R.  3 
App.  Gas.  1218,  1268,  6  Eng.  Rul. 
Cas.  777,  39  L.  T.  N.  S.  269, 27  Weekly 
Rep.  65;  Twycross  v.  Grant,  L.  R. 
2  C.  P.  D.  469,  527,  541;  Emma 
Silver  Mining  Co.  v.  Lewis,  L.  R. 
4  C.  P.  D.  396,  407;  Whaley 
Bridge  Calico  Printing  Co.  v.  Green, 
L.  R.  5  Q.  B.  D.  109,  111;  Watts 
Law  of  Promoters,  p.  1. 

16.  South  Missouri  Pine  Lumber 
Co.  v.  Crommer,  202  Mo.  504,  101 
S.  W.  22,  citing  23  Am.  &  Eng. 
Encyc.  of  Law,  (2nd  ed.),  233. 


PROMOTERS  GENERALLY.  ? 

statement  is  not  entirely  accurate,  and  probably  intends  nothing 
more  than  that  whether  a  given  person  is,  or  is  not,  a  promoter  of 
a  given  corporation,  must  be  determined  by  the  facts  of  the 
particular  case. 

An  understanding  of  the  scope  and  meaning  of  the  term  pro- 
motor  can  probably  best  be  obtained  by  a  consideration  of  some 
of  the  circumstances  which  have  been  held  to,  and  some  of  the  cir- 
cumstances which  have  been  held  not  to,  give  rise  to  the  relation. 

In  the  ordinary  case  certain  persons, .having  conceived  the  idea 
of  organizing  a  corporation  for  some  more  or  less  well-defined 
purpose,  select  the  directors,  take,  or  cause  to  be  taken,  the 
necessary  steps  in  the  formal  organization  of  the  corporation, 
procure  the  conveyance  to  the  company  of  the  properties  and 
contract  rights  which  they  deem  necessary  for  the  carrying  on  of 
the  contemplated  business,  and  solicit  subscriptions  for  the  shares. 
These  persons  are  obviously  the  promoters  of  the  corpora- 
tion.17 It  is  not,  however,  to  constitute  one  a  promoter  of  a  cor- 

17.  For  cases  illustrative  of  the  1115,    but   modified,   58    N.    J.    Eq. 

circumstances  which  constitute  the  556,  43  Atl.  671;  Arnold  v.  Searing, 

relation,  see  78  N.  J.  Eq.  146,  156-157,  78  Atl. 

Illinois. — Goodwin  v.  Wilbur,  104  762,  766. 

111.  App.  45,  51-52.  Ohio. — Shawnee     Commercial     & 

Massachusetts. — Old        Dominion  Savings    Bank    Co.    v.    Miller,    24 

Copper,   etc.,    Co.    v.    Bigelow,    203  Ohio  C.  C.  198,  209. 

Mass.    159,   177,    89   N.    E.    193,   40  Virginia.— Richlands     Oil    Co.   v. 

L.  R.  A.  N.  S.  314;  same  v.  same,  Morriss,  108  Va.  288,  298,  61  S.  E. 

188  Mass.   315,   320,   327,   74   N.    E.  762. 

653,  108  Am.  St.  Rep.  479.  Wisconsin. — Pittsburg  Mining  Co. 

New    York. — Brewster    v.    Hatch,  v.   Spooner,  74  Wis.  307,  42  N.   W. 

122   N.    Y.    349,    360-362,    25   N.    E.  259,  17  Am.  St.  Rep.  149,  24  Am.  & 

605,  33  N.  Y.  St.  Rep.  527.  Eng.  Corp.  Cas.  1. 

New  Jersey. — Plaquemines  Tropi-  United    Kingdom    and     Colonies. 

cal  Fruit  Co.  v.  Buck,  52  N.  J.  Eq.  Twycross  v.  Grant,  L.  R.  2  C.  P.  D. 

219,   234,   27    Atl.    1094,   44   Am.    &  469,  541;  Emma  Silver  Mining  Co. 

Eng.    Corp.    Cas.    686;    Woodbury  v.  Grant  L.  R.  11  Ch.  Div.  918,  936, 

Heights  Land  Co.  v.  Loudenslager,  Whaley  Bridge  Calico  Printing  Co. 

55   N.    J.    Eq.    78,    88,   35   Atl.   436,  v.  Green,  L.  R.  5  Q.  B.  D.  109,  111 ; 

affirmed,  56  N.  J.  Eq.  411,  41  Atl.  Erlanger    v.    New    Sombrero    Phos- 


8 


THE  LAW  OF  PROMOTERS. 


poration,  necessary  that  he  should  have  done  all  of  these  things — • 
doing  some  of  them  may  be  sufficient.18 

The  solicitation  of  subscriptions  at  any  time  before  the  cor- 
poration is  fully  organized,  generally  constitutes  the  solicitor  a 
promoter,19  unless  he  avowedly  acts  under  the  employment  of 
another,  in  which  case  the  employer,  rather  than  the  employee, 
should  properly  be  considered  the  promoter.  The  term  has 
also  been  applied  to  one  who  was  active  in  securing  a  charter 
and  in  constant  attendance  at  meetings  of  the  incorporators  and 
directors,20  but  it  is  not  applied  to  the  mere  signers  of  *the  certifi- 
cate of  incorporation.21 

One  who  attends  to  the  formalities  of  the  incorporation  is  not 
necessarily  a  promoter.  In  The  Telegraph  v.  Loetscher  22  the 
defendant  claimed  that  this  was  all  that  he  had  done.  The  court 
took  pains  to  show  that  the  defendant  had  also  exhibited  to  pro- 


phate  Co.,  L.  R.  3  App.  Cas.  1218, 
1283-1284,  6  Eng.  Rul.  Cas.  777, 
39  L.  T.  N.  S.  269,  27  Weekly  Rep. 
65 ;  In  re  Olympia,  Ltd.,  1898,  2  Ch. 
Div.  153, 181-182 ;  (affirmed  sub  nom. 
Gluckstein  v.  Barnes,  1900,  App. 
Cas.  240)  ;  Lagunas  Nitrate  Co.  v. 
Lagunas  Syndicate,  1899,  2  Ch.  Div. 
392,  441;  Re  Sale  Hotel  &  Botan- 
ical Gardens,  Ltd.,  78  L.  T.  N.  S. 
368;  Ross  v.  Estates  Investment 
Co.,  L.  R.  3  Eq.  122,  123,  affirmed, 
L.  R.  3  Ch.  App.  682. 

18.  Emma    Silver   Mining   Co.    v. 
Grant,  L.   R.  11  Ch.  Div.  918,  936. 

19.  In    South   Joplin   Land   Com- 
pany v.  Case,  104  Mo.  572,  16  S.  W. 
390,  38  Am.  &  Eng.  Corp.  Cas.  333, 
the  court  laid  stress  upon  the  soli- 
citation   of    subscriptions,    but    the 
defendants    had    also    brought    the 
corporation     into     existence.       See 
also    South   Missouri   Pine   Lumber 


Company  v.  Crommer,  202  Mo.  504, 
519,  101  S.  W.  22,  26;  The  Tele- 
graph v.  Loetscher,  127  Iowa  383, 
101  N.  W.  773,  4  Am.  &  Eng.  Ann. 
Cas.  667,  and  see  Scottish  Pac. 
Coast  Min.  Co.,  Ltd.,  v.  Falkner, 
Bell  &  Co.,  Sess.  Cas.  15  Rettie  290, 
305.  But  see  Thames  Navigation 
Co.  v.  Reid,  9  Ont.  754,  (reversed  on 
another  ground,  13  Ont.  App.  303) 
and  Milwaukee  Cold  Storage  Co.  v. 
Dexter,  99  Wis.  214,  74  N.  W.  976, 
40  L.  R.  A.  837. 

20.  Hayden    v.    Green,    66    Kan. 
204,  71  Pac.  236. 

21.  St.  Louis,  F.  S.  &  W.  R.  Co. 
v.    Tiernan,    37    Kan.    606,    632,    15 
Pac.  544,  558-559.     See  also  Benton 
v.    Minneapolis    Tailoring    &    Mfg. 
Co.,    73   Minn.    498,   506-507,   76  N. 
W.  265,  267-8. 

22.  127  Iowa  383,  101  N.  W.  773, 
4  Am.  &  Eng.  Ann.  Cas.  667. 


PROMOTERS  GENERALLY.  9 

spective  subscribers,  the  machine  which  the  corporation  was  to 
manufacture,  and  had  requested  acquaintances  to  subscribe  for 
shares.  These  facts,  it  was  held,  made  him  a  promoter. 

§  5.  Sharing  promoter's  profits. 

One  who,  in  consideration  of  a  share  of  the  profits,  assists  the 
promoter  in  the  organization  of  a  corporation,  thereby  becomes 
himself  a  promoter,23  and  it  has  been  held  that  a  person  by 
agreeing,  in  consideration  of  a  share  of  the  promoter's  profits,  to 
become  a  director  of  the  proposed  corporation,  makes  himself 
liable  as  a  promoter  from  the  time  that  such  agreement  is 
made.24 

§  6.  Carrying  on  promotion  by  agents. 

It  is  not  necessary,  in  order  to  constitute  one  a  promoter,  that 
he  should  personally  perform  any  act  of  promotion.  He  becomes 
a  promoter  if  the  promotion  is  carried  on  by  his  authorized 
agents,25  or  if,  though  he  does  not  appear  in  the  transaction,  the 
ostensible  promoters  are  in  fact  his  puppets  acting  under  his  con- 
trol.26 

\ 

§  7.  Acting  as  vendor,  vendor's  agent,  etc. 

The  mere  fact  of  selling,  or  agreeing  to  sell  property  to  the 
corporation  to  be  formed,  or  to  its  promoters,  does  not  constitute 
the  vendor  a  promoter.27  If,  however,  the  owner,  in  order  to  pro- 

23.  Emma    Silver   Mining  Co.   v.      W.    390,    392-393,    38    Am.    &    Eng. 
Lewis,  L.  R.  4  C.  P.  D.  396,  408.    See     Corp.  Gas.  333. 

Stratford  Fuel  Ice  C.  &  C.  Co.  v.  26.  Phosphate  Sewage  Co.,  v. 
Mooney,  21  Ont.  L.  R.  426,  441.  Hartmont,  L.  R.  5  Ch.  D.  394,  452, 

24.  Nant-Y-Glo  and  Blaina  Iron-      46  L.  J.  Ch.  661. 

works  Company  v.  Grave,  L.  R.  12  27.  Federal. — Wiser     v.     Lawler, 

Ch.  Div.  738,  744.    A  similar  case  is  189  U.  S.  260,  265,  47  L."  Ed.  802,  23 

Richlands  Oil  Company  v.  Morriss,  S.  C.  624. 

108  Va.  288,  293-294,  61  S.  E.  762,  California.— Blood   v.    La    Serena 

763-764.  Land  &  Water  Co.,  134  Cal.  361,  66 

25.  South    Joplin    Land    Co.    v.  Pac.  317. 

Case,   104  Mo.   572,  580-581,  16   S.          Missouri.— South     Missouri     Pine 


10 


THE  LAW  OF  PROMOTERS. 


cure  the  sale  of  his  property,  assists  in  the  organization  of  the 
company,  he  thereby  subjects  himself  to  the  restrictions  which  the 
law  imposes  upon  promoters.28 

Acting  as  agent  for  the  vendor  on  the  sale  of  property  to  a 
contemplated  company,  does  not  constitute  the  agent  a  promoter 
of  the  corporation,29  but  if  the  agent  himself  organizes  the  cor- 
poration, he  becomes  a  promoter,  and  the  fact  that  he  was  first 
the  agent  of  the  vendor,  does  not  exonerate  him  from  liability  to 
account  to  the  corporation  for  any  secret  commissions  received 
from  his  principal.30  * 

In  Bagnall  v.  Carlton,31  Richard  Bagnall,  life  tenant  under  the 
will  of  James  Bagnall,  deceased,  promised  Duignan  &  Lewis,  so- 
licitors for  the  trustees  of  the  Bagnall  estate,  a  commission  of 
£1500  if  they  would  find  a  purchaser  for  certain  collieries  and  iron 


Lumber  Co.  v.  Crommer,  202  Mo. 
504,  101  S.  W.  22;  South  Joplin 
Land  Co.  v.  Case,  104  Mo.  572,  578, 
580,  16  S.  W.  390,  392,  38  Am.  & 
Eng.  Corp.  Cases  333,  quoted  in 
Exter  v.  Sawyer,  146  Mo.  302,  322, 
47  S.  W.  951,  956. 

New  York. — Finck  v.  Canadaway 
Fertilizer  Co.,  152  N.  Y.  App.  Div. 
391,  136  Supp.  914,  modified  and 
affirmed,  208  N.  Y.  607,  102  N.  E. 
1102. 

Pennsylvania. — Densmore  Oil  Co. 
v.  Densmore,  64  Pa.  43,  52. 

Wisconsin. — Forest  Land  Co.  v. 
Bjorkquist,  110  Wis.  547,  86  N.  W. 
183. 

United  Kingdom  and  Colonies. — 
Cover's  Case,  L.  R.  20  Eq.  114,  122, 
affirmed,  L.  R.  1  Ch.  Div.  182. 

28.  See  South  Joplin  Land  Co.  v. 
Case,  104  Mo.  572,  579,  581,  16  S.  W. 
390,  392,  393,  38  Am.  &  Eng.  Corp. 
Cas.  333;  Finck  v.  Canadaway  Fer- 
tilizer Co.,  152  N.  Y.  App.  Div.  391, 


136  Supp.  914,  modified  and  af- 
firmed, 208  N.  Y.  607,  102  N.  E. 
1102. 

29.  Blood  v.  La   Serena  Land  & 
Water  Co,  134  Cal.  361,  66  Pac.  317; 
South  Missouri  Pine  Lumber  Com- 
pany v.  Crommer,  202  Mo.  504,  101 
S.   W.   22;    Thames  Navigation   Co. 
v.  Reid,  9  Ont.  754,  765,   (reversed 
on    another   ground,    13    Ont.    App. 
303).      See    Second   National    Bank 
v.     Greenville     Screw    Point    Steel 
Fence  Post  Co.,  23  Ohio  C.  C.  274, 
280;    also    Selover    v.    Isle   Harbor 
Land  Co.,  91  Minn.  451,  98  N.  W. 
344,  100  Minn.  253,  111  N.  W.  155. 

30.  Lydney  &  Wigpool  Iron  Ore 
Co.  v.   Bird,  L.  R.  33  Ch.  Div.   85, 
94-95,    24   Am.    &    Eng.    Corp.    Cas, 
23,    reversing,    L.    R.    31    Ch.    Div. 
328,   12  Am.   &  Eng.   Corp.   Cas.   6. 

31.  L.    R.    6    Ch.    Div.    371,    382. 
A      somewhat      similar      case      is 
Glasier  v.  Rolls>  L.  R.  42  Ch.  Div. 
436. 


PROMOTERS  GENERALLY.  ^ 

works  owned  by  the  estate.  Duignan  &  Lewis  put  themselves  in 
communication  with  the  Richardsons,  who  introduced  them  to  one 
Carlton.  Carlton  applied  to  the  defendant  Grant,  and  the 
Richardsons,  Carlton  and  Grant  thereupon  proceeded  to  organize 
a  corporation  to  take  over  the  properties,  first  entering  into  an 
agreement  with  the  Bagnall  trustees  that  the  latter  should  pay 
them  a  commission  of  £85,000.  While  the  life  tenant  refused  to 
act  as  a  director  of  the  company  on  the  ground  that  he  wished  to 
be  relieved  from  business,  two  of  the  three  trustees  of  the  Bagnall 
estate  consented  to  become  directors,  and  received  a  debenture 
bond  each,  from  the  promoters.  A  prospectus  of  the  company 
was  submitted  to  the  trustees  of  the  Bagnall  estate,  one  of  whom 
made  some  alterations  therein.  Duignan  &  Lewis  acted  as  solici- 
tors upon  the  organization  of  the  company.  The  vice-chancellor 
said  that  it  was  impossible  to  doubt  that  each  of  these  persons 
was  employed,  and  actively  engaged,  in  the  formation  of  the  com- 
pany, and  that  all  of  them  must  be  held  to  have  been  its  pro- 
moters. 

§  8.  Bankers  and  solicitors,  not  promoters. 

It  has  been  said  that  neither  the  bankers  nor  the  solicitors  of 
a  company  in  process  of  formation  are,  as  such,  its  promoters,32 
but  the  solicitors,  at  least,  are  in  their  dealings  with  the  company, 
subject  to  restrictions  and  limitations  similar  to  those  imposed 
upon  promoters.33 

32.  In  re  Great  Wheal  Polgooth,  porations,  see  Bagnall  v.  Carlton,  L. 
Ltd.,  53  L.  J.  Ch.  N.  S.  42,  49  L.  T.  R.    6    Ch.    Div.    371,    401-402,    404, 
N.  S.  20,  32  W.  R.  107 ;  In  re  Ken-  409 ;    Erlanger    v.    New    Sombrero 
sington   Station  Act,  L.   R.   20  Eq.  Phosphate  Co.,   L.   R.   3   App.   Gas. 
197.  1218,    1246-1247,   6    Eng.    Rul.    Cas. 

33.  Tyrrell   v.    Bank   of   London,  777,  39  L.  T.  N.  S.  269,  26  Weekly 
10  H.  L.  Cas.  26,  11  Eng.  Rep.  934.  Rep.  65;   Phosphate  Sewage  Co.  v. 

For  remarks  on  the  proper  con-  Hartmont,  L.  R.  5  Ch.  Div.  394, 
duct  of  solicitors  of  embryo  cor-  443-444,  452,  46  L.  J.  Ch.  661. 


12  THE  LAW  OF  PROMOTERS. 

§  9.  Subscribers  for  shares,  not  promoters. 

A  mere  subscriber  to  the  shares  of  a  proposed  company  is  not 
one  of  its  promoters,34  but  there  are  cases  holding  that,  just  as 
a  promoter,  he  will  not,  without  the  knowledge  of  his  associates, 
be  permitted  to  profit  by  his  transactions  with  the  company.35 
There  is  in  fact  some  authority  for  a  rule  that  a  promoter  does 
not  assume  a  trust  relation,  either  to  the  company,  or  to  those 
whose  subscriptions  he  solicits,  unless  he  is  himself  also  a  sub- 
scriber for  its  shares.36 

» 

§  10.  Promoter's  partners  as  promoters. 

Whether  or  not  a  firm  of  which  the  promoter  is  a  member 
may  be  considered  to  be  a  promoter,  generally  depends  upon 
whether  the  promotion  of  corporations  is,  or  is  not,  within  the 
scope  of  the  partnership  business,  and  whether  the  promoting 
partner  acted  for  himself,  or  for  the  partnership,  in  the  trans- 
action.37 The  promoter's  partners  cannot,  in  any  event,  compel 

34.  Benton   v.    Minneapolis   Tail-  37.  Walker     v.     Anglo-American 
oring   &    Mfg.    Co.,    73   Minn.    498,  Mortgage  &  Trust  Co.,  72  Hun   (N. 
506,    76    N.    W.    265,    268;    Thames  Y.)    334,    340,    55    St.    Rep.    54,    25 
Navigation  Co.  v.  Reid,  9  Ont.  754,  Supp.    432;    Boice    v.    McCormick, 
765,  reversed  on  another  ground,  13  106  N.  Y.  App.  Div.  539,  94   Supp. 
Ont.   App.  303.  892;    Lydney  &  Wigpool   Iron   Ore 

35.  Lomlta  Land  &  Water  Co.  v.  Co.  v.  Bird,  L.  R.  33  Ch.  Div.  85, 
Robinson,    154   Cal.   36,   49,   50,   97  95,  24  Am.  &  Eng.  Corp.  Cas.  23; 
Pac.  10,  15,  16,  18  L.  R.  A.  N.  S.  Phosphate  Sewage  Co.  v.  Hartmont, 
1106,    1128,    1130-1132;     Koster    v.  L.  R.  5  Ch.  Div.  394,  443,  46  L.  J. 
Pain,  41  N.  Y.  App.  Div.  443,  58  N.  Ch.   661. 

Y.   Supp.  865;  Cf.  Thames  Naviga-  The  promoter's  partners  are  not 

tion  Co.  v.  Reid,  supra,  also  Willock  entitled  to  share  his  compensation 

v.  Dilworth,  204  Pa.  St.  492,  54  Atl.  if   his    services   as    promoter   were 

278.  See  post,  §  90.  independent     of     the     partnership, 

36.  Densmore    Oil    Co.    v.    Dens-  even    though    the    corporation    was 
more,  64  Pa.  St.  43,  53-54;  and  see  organized    to,    and    did,    take    over 
Yeiser  v.  U.  S.  Board  &  Paper  Box  the  partnership  property.    Carter  v. 
Co.,  107  Fed.  340,  344,  46  C.  C.  A.  Tucker,  138  Ky.  34,  127  S.  W.  498. 
567,  52  L.  R.  A.  724. 


PROMOTERS  GENERALLY.  ^3 

a  division  of  unlawful  profits  received  by  the  promoter 38  and 
whether  or  not  the  partnership  can  be  called  a  promoter  of  the 
corporation,  any  profit  or  benefit  which  would  be  unlawful  if 
received  by  the  promoter,  is  equally  unlawful  if  given  to  his 
firm.39 

§  11.  Corporations  as  promoters. 

There  is  no  reason  why  a  corporation  should  not,  if  such  act 
is  within  the  scope  of  its  corporate  powers,  promote  another 
corporation,  and  thereby  bring  itself  within  the  definition  of  the 
term  promoter  and  the  limitations  which  flow  from  that  re- 
lation.40 If  the  promotion  of  other  companies  is  beyond  the 
corporate  powers,  the  organization  of  another  company  by  the 
officers  of  an  existing  corporation  does  not  constitute  the  ex- 
isting corporation  the  promoter  of  the  new  company.41  A  cor- 
poration cannot,  however,  by  a  plea  of  ultra  vires,  escape  lia- 
bility for  unlawful  promoter's  profits  actually  received  by  it.42 

38.  Travis   v.   Travis,   140  N.   Y.  41. — Thames    Navigation    Co.    v. 
App.    Div.    191,    124    N.    Y.    Supp.  Reid,  9  Ont.  754,  762,   reversed  on 
1021.  another  ground,  13  Ont.   App.  303. 

39.  Scottish    Pac.    Coast    Mining  The     existence    of     such     power 
Co.,   Ltd.,   v.    Falkner,    Bell   &  Co.,  must  be  based  upon  some  provision 
Sess.    Gas.    15    Rettie    290,    citing  of    the    corporate    charter.    Eakins 
Imperial  Mercantile  Credit  Associa-  v.   American  White  Bronze  Co.,  75 
tion  v.  Coleman,  L.  R.  6  H.  L.  189.  Mich.  568,  42  N.  W.  982 ;   Richard 

40.  A.   J.    Cranor   Co.    v.    Miller,  Hanlin  Millinery  Co.  v.  Mississippi 
147   Ala.   268,   41    So.   678;   Hooper  Valley  Trust  Co.,  251  Mo.  553,  158 
v.   Central  Trust  Co.,   81   Md.   559,  S.  W.  359. 

585,  32  Atl.   505,  29   L.   R.   A.   262,          As  to  provisions  from  which  such 

270 ;  Electric  Welding  Co.  v.  Prince,  power  may  be  inferred,  see  Richard 

195  Mass.  242,  81  N.  E.  306;  Crowe  Hanlon  Millinery  Co.  v.  Mississippi 

v.  Malba  Land  Co.,  76  N.  Y.  Misc.  Valley  Trust  Co.,  251  Mo.  553,  158 

676,  135  Supp.  454;  In  re  Leeds  &  S.    W.    359.      See   also    Machen    on 

Hanley  Theatres  of  Varieties,  1902,  The  Modern   Law  of  Corporations, 

2  Ch.  Div.  809,  810,  827,  831;   La-  §   85. 

gunas  Nitrate  Co.  v.  Lagunas  Syn-         42.  Richard  Hanlon  Millinery  Co. 

dicate,  1899,  2  Ch.  D.  392,  409,  423,  v.  Mississippi  Valley  Trust  Co.,  251 

441.  Mo.  553,  158  S.  W.  359. 


14  THE  LAW  OF  PROMOTERS. 

§  12.  Use  of  the  word  promoter  in  America. 

Commissioner  Simpson,  writing  for  the  Supreme  Court  of 
Kansas,  in  the  year  1887,43  said  that  the  word  promoter  is  used 
in  a  much  more  restricted  sense  in  this  country  than  in  Eng- 
land. The  commissioner  pointed  out  that  "  This  word  promoter 
had  its  origin  in  the  methods  by  which  joint-stock  companies 
were  formed  in  England,  where  by  law  they  were  declared  part- 
nerships. Subsequently,  when  the  era  of  railroad  building  began 
in  that  country,  the  business  of  promoting  the  organization  of 
such  companies  assumed  definite  form.  The  ordinary  proceeding 
was  this :  The  promoter  introduced  the  enterprise  to  the  notice 
of  persons  of  wealth  in  the  locality  through  which  the  line  of  the 
road  was  proposed  to  be  located,  informing  them  of  its  nature 
and  prospects,  and  furnishing  an  estimate  of  its  probable  cost. 
These  persons  were  solicited  to  aid  by  their  influence  or  subscrip- 
tions, or  both.  Enough  persons  were  secured  to  constitute  a  pro- 
visional committee,  and  then  this  committee  appointed  from  their 
number  a  managing  committee,  which  issued  a  prospectus,  an- 
nouncing the  nature  and  probable  profits  of  the  scheme,  the  pro- 
posed means  to  carry  it  out,  the  amount  of  capital  required,  the 
number  and  price  of  shares,  and  other  details,  to  which  were  gen- 
erally attached  the  names  of  the  promoters,  with  references  to 
the  names  of  those  persons  constituting  the  provisional  com- 
mittees. If  all  this  resulted  in  fair  probabilities  of  success,  ap- 
plication was  then  made  to  parliament  for  a  bill  of  incorporation. 
If  the  scheme  failed,  the  expenses  incurred  gave  rise  to  litigation, 
and  many  questions  as  to  the  liability  of  these  committees  and  of 
the  promoters  were  determined.  If  the  incorporation  was  se- 
cured by  the  action  of  parliament,  then  another  class  of  questions 
arose  as  to  what  acts  of  the  promoters  could  be  ratified  by,  and 
what  acts  resulted  to  the  benefit  of,  the  incorporation,  and  many 

43.  St.  Louis  F.  S.  &  W.  R.  Co.  v.      Pac.  544,  558. 
Tiernan,   37   Kan.   606,   630-631,   15 


PROMOTERS  GENERALLY.  }5 

others  growing  out  of  the  condition  of  affairs."  The  commis- 
sioner adds,  that  this  method  "  has  no  resemblance  to  our  method 
of  organizing  corporations.  It  is  true  that  the  word  has  been 
found  to  have  its  uses  in  our  jurisprudence,  but  in  a  much  more 
restricted  sense  than  that  used  in  the  English  reports." 

The  substantial  difference  in  the  methods  of  organizing  cor- 
porations in  the  two  countries,  is  that  the  charter  is  in  England 
not  obtained  until  after  the  share  capital  is  largely  subscribed, 
and  often  not  until  after  a  considerable  part  of  the  subscription 
moneys  have  been  paid,44  while  in  this  country  the  corporation 
is  generally  legally  organized  before  any  money  is  actually  paid 
in,  and  often  before  the  subscription  list  is  prepared.  The  sit- 
uation, if  the  scheme  proves  abortive,  may  in  the  one  case  be  quite 
different  from  the  other.45 

The  term  promoter  has,  however,  been  borrowed  and  is  now 
in  general  use  in  this  country,  and  the  obligations  and  temp- 
tations of  the  relation,  and  the  rules  of  law  applicable  thereto, 
are,  except  in  cases  arising  out  of  the  abandonment  of  the  con- 
templated corporation,  substantially  the  same  in  both  coun- 
tries. 

§  13.  Meaning  and  effect  of  the  term. 

The  conclusion  to  be  drawn  from  the  preceding  sections,  is 
that  a  person  may  be  said  to  be  a  promoter  of  a  corporation  if 
before  its  organization,  he  directly  or  indirectly  solicits  sub- 
scriptions to  its  stock,  or  assumes  to  act  in  its  behalf  in  the  pur- 
chase of  property,  or  in  the  securing  of  its  charter,  or  other- 
wise assists  in  its  organization. 

44.  As  to  the  methods  of  organ!-  Corporations,     p.     206;     Brice    on 

zation  pursued  in  England,  see  also  Ultra  Vires  2nd.  Am.  Ed.  p.  567,  note. 

Miller   v.    Denman,   49   Wash.    217,  45.  The    questions     which    arise 

222,  95  Pac.  67,  69,  16  L.  R.  A.  N.  when  the   scheme  of  incorporation 

S.    348,    351 ;      Thompson    on    Lia-  proves  abortive  are  discussed  in  a 

bility    of    Officers    and    Agents    of  subsequent  chapter.    See  post,  chap. 

XIX. 


16  THE  LAW  OF  PROMOTERS. 

It  must,  however,  be  remembered  that  calling  a  person  a  "  pro- 
moter "  does  not  of  itself  impose  any  responsibility  upon  him.46 
The  responsibility  of  the  promoter  depends  upon  what  he  does, 
not  upon  the  name  by  which  he  is  called.47  "  Care  must  be  taken,'* 
says  Lord  Justice  Lindley,48  "  not  to  be  misled  by  words.  Owing 
to  the  ambiguity  in  the  meaning  of  the  word  promoter,  and  the 
difficulty  of  defining  his  exact  relation  to  the  company  he  pro- 
cures to  be  formed,  it  is  unsafe  to  say  that  any  particular  person 
was  a  promoter  of  a  particular  company,  and  to  infer  from  thence, 
that  he  is  liable  to  account  to  it  as  if  he  had  been  its  trustee.  The 
question  in  each  case  must  be,  what  has  the  so-called  promoter 
done  to  make  himself  liable  to  the  demand  made  against  him? 
What  fraud  or  breach  of  trust  has  he  committed  or  been  party  or 
privy  to?  If  none,  he  is  under  no  liability:  if  any,  he  is  liable 
accordingly  by  whatever  name  he  may  be  called  or  by  whatever 
terms  his  relation  to  the  company  may  be  expressed." 

§  14.  Fiduciary  relation. 

The  fact  of  being  a  promoter  does  not  of  itself  cast  upon 
one  any  active  duties  toward  the  company  to  be  formed.  The 
promoter  is,  in  the  absence  of  a  contract  with  some  other  person, 
avmere  volunteer  who  may  render  as  much,  or  as  little  service  as  he 
sees  fit,  and  may  discontinue  his  efforts  at  any  time  that  he  desires. 

In  the  carrying  on  of  such  transactions  as  he  does  undertake 
he  stands,  however,  in  a  fiduciary  relation  to  the  corporation 
which  he  creates  49  and  is  held  to  the  high  standards  which  the 

46.  Hutchinson    v.     Simpson,    92  5th   ed.   349,   6th   ed.   Vol.   1,   page 
N.  Y.  App.  Div.  382,  398,  87  N.  Y.  488.     See  also  the  opinion  of  Lind- 
Supp.  369.  ley,    L.    J.,    in    Lydney   &    Wigpool 

47.  Brooker       v.       William      H.  Iron  Ore  Co.  v.  Bird,  supra. 
Thompson  Trust  Co.,   254  Mo.  125,  49.  Federal. — Dickerman  v.  North- 
162  S.  W.  187,  194;  Lydney  &  Wig-  ern    Trust     Co.,     176     U.     S.     181, 
pool  Iron  Ore  Co.  v.  Bird,  L.  R.  33  204,  20  Sup.  Ct.  311,  44  L.  Ed.  423; 
Ch.  Div.  85,  93,  24  Am.  &  Eng.  Corp.  Commonwealth  S.  S.  Co.,  v.  Ameri- 
Cas.  23.  can     Shipbuilding     Co.,     197     Fed. 

48.  Lindley    on   Companies    Law,  797,     804-805,    affirmed,    215    Fed. 


PROMOTERS  GENERALLY. 


17 


law  imposes  upon  directors  and  other  fiduciaries.50     He  is  bound 
to  exercise  the  utmost  good  faith,51  his  dealings  must  be  open 


Rep.  296,  131  C.  C.  A.  596;  Cortes 
Co.  v.  Thannhauser,  45  Fed.  Rep. 
730,  739;  Hitchcock  v.  Hustace,  14 
Hawaii  232. 

Alabama. — Moore  v.  Warrior 
Coal  &  Land  Co.,  178  Ala.  234,  59 
So.  219,  Am.  &  Eng.  Ann.  Cas.,  1915 
B.  173. 

Connecticut. — Yale  Gas  Stove  Co. 
v.  Wilcox,  64  Conn.  101,  119,  120, 
29  Atl.  303,  308,  309,  25  L.  R.  A. 
90,  42  Am.  St.  Rep.  159,  47  Am.  & 
Eng.  Corp.  Cas.  647. 

Illinois. — Mississippi  Lumber  Co. 
v.  Joice,  176  111.  App.  110,  120. 

Massachusetts. — Old  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  203 
Mass.  159,  177-178,  89  N.  E.  193, 
40  L.  R.  A.  N.  S.  314,  same  v.  same, 
188  Mass.  315,  320,  327,  74  N.  E. 
653,  108  Am.  St.  R.  479;  Keith  v. 
Radway,  220  Mass.  532, 108  N.  E.  498. 

New  Jersey. — Bigelow  v.  Old 
Dominion  Copper,  etc.,  Co.,  74  N. 
J.  Eq.  457,  506,  71  Atl.  153;  Pla- 
quemines  Tropical  Fruit  Co.  v. 
Buck,  52  N.  J.  Eq.  219,  230,  27  Atl. 
1094,  44  Am.  &  Eng.  Corp.  Cas.  686. 

New  York. — Colton  Improvement 
Co.  v.  Richter,  26  Misc.  26,  30,  55, 
Supp.  486;  Cf.  Heckscher  v.  Eden- 
born,  203  N.  Y.  210,  222,  96  N.  E. 
441,  reversing,  137  App.  Div.  899, 
122  Supp.  1131,  which  followed 
131  App.  Div.  253,  259, 115  Supp.  673. 

Ohio. — Second  National  Bank  v. 
Greenville  Screw  Point  Steel  Fence 
Post  Co.,  23  Ohio  C.  C.  274,  281; 
Shawnee  Comm.  &  Sav.  Bk.  Co.  v. 
Miller,  24  Ohio  C.  C.  198,  210. 

Oregon. — Johnson     v.      Sheridan 


Lumber  Co.,  51  Or.  35,  40,  93  Pac. 
470,  472;  Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  76,  96  Pac.  528,  531. 

Virginia. — Bosher  v.  Richmond  & 
H.  Land  Co.,  89  Va.  455,  460-461, 
16  S.  E.  360,  362. 

United  Kingdom  and  Colonies. — 
New  Sombrero  Phosphate  Co.  v.. 
Erlanger,  L.  R.  5  Ch.  Div.  73,  11&, 
25  W.  R.  436,  affirmed,  sub  nom. 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218,. 
1236,  1269,  1284,  6  Eng.  Rul.  Cas. 
777,  39  L.  T.  N.  S.  269,  27  W.  R. 
65 ;  Gluckstein  v.  Barnes,  1900,  App. 
Cas.  240,  257;  Bagnall  v.  Carlton, 
L.  R.  6  Ch.  Div.  371,  382-386;  Emma 
Silver  Mining  Co.  v.  Grant,  L.  R. 
11  Ch.  Div.  918,  935-936;  Nant-Y- 
Glo  &  Blaina  Ironworks  Co.  v. 
Grave,  L.  R.  12  Ch.  Div.  738,  749; 
Alexandra  Oil  &  Dev.  Co.,  v.  Cook, 
11  Ont.  W.  R.  1054. 

50.  Tegarden   Bros.   v.   Big   Star 
Zinc.  Co.,  71  Ark.  277,  281,  72  S.  W. 
989,    991;    Old    Dominion    Copper, 
etc.,  Co.  v.  Bigelow,  203  Mass.  159, 
177-178,  89  N.  E.  193,  40  L.  R.  A. 
N.  S.  314  and  cases  cited. 

See  note  to  Lomita  Land  & 
Water  Co.  v.  Robinson,  18  L.  R.  A. 
N.  S.  1107-1108. 

51.  Federal. — Dickerman  v.  North- 
ern   Trust    Co.,     176    U.     S.    181, 
204,  20  Supp.  Ct.  311,  44  L.  Ed.  423. 

Alabama. — Moore  v.  Warrior 
Coal  &  Land  Co.,  178  Ala.  234,  59 
So.  219. 

Connecticut. — Yale  Gas  Stove  Co. 
v.  Wilcox,  64  Conn.  101,  120,  29 
Atl.  303,  25  L.  R.  A  90,  42  Am.  St. 


18 


THE  LAW  OF  PROMOTERS. 


and  fair,52  and  he  must  not  take  advantage  of  the  corporation,  nor 
of  the  subscribers  for  its  shares.53 

A  promoter  has,  in  theory  of  law,  no  power  whatsoever  to  act 
for,  or  in  any  way  bind,  the  corporation  which  he  organizes.5* 
In  practice,  however,  "  he  has  in  his  hands  the  creation  and  mold- 
ing of  the  company ;  he  has  the  power  of  defining  how  and  when 


Rep.  159,  47  Am.  &  Eng.  Corp.  Gas. 
647. 

Illinois. — Goodwin  v.  Wilbur,  104 
111.  App.  45,  52. 

Iowa. — Caffee  v.  Berkley,  141 
Iowa  344,  118  N.  W.  267. 

Wisconsin. — First  Avenue  Land 
Co.  v.  Hildebrand,  103  Wis.  530, 
534,  79  N.  W.  753,  754. 

United  Kingdom  and  Colonies. — 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
1255,  6  Eng.  Rul.  Cas.  777,  39  L.  T. 
N.  S.  269,  27  W.  R.  65 ;  Twycross  v. 
Grant,  L.  R.  2  C.  P.  D.  469,  538. 

52.  A.    J.    Cranor    Co.    v.    Miller, 
147  Ala.  268,  273,  41  So.  678,  680; 
The    Telegraph    v.    Loetscher,    127 
Iowa  383,  387,  101  N.  W.  773,  774, 
4  Am.  &  Eng.  Ann.  Cas.  467. 

See  note  to  Lomita  Land  & 
Water  Co.,  v.  Robinson,  18  L.  R.  A. 
N.  S.  1107-1108. 

53.  Federal. — Yeiser     v.     U.     S. 
Board  &   Paper  Co.,   107  Fed.  340, 
344,  46  C.  C.  A.  567,  52  L.  R.  A.  724 ; 
Chandler    v.    Bacon,    30    Fed.    Rep. 
538,    540;    Dickerman    v.    Northern 
Trust   Co.,   176   U.    S.   181,    204,   20 
Sup.  Ct.  311,  44  L.  Ed.  423. 

Alabama. — Moore  v.  Warrior  Coal 
&  Land  Co.,  178  Ala.  234,  59  So.  219. 

California. — Ex-Mission  Land  & 
Water  Co.  v.  Flash,  97  Cal.  610, 
626,  32  Pac.  600,  604. 


Illinois. — Mississippi  Lumber  Co. 
v.  Joice,  176  111.  App.  110,  120. 

Iowa. — Hinkley  v.  Sag  Oil  &  Pipe 
Line  Co.,  132  Iowa  396,  402,  107  N. 
W.  629,  632,  119  Am.  St.  R.  564; 
The  Telegraph  v.  Loetscher,  127 
Iowa  383,  388,  101  N.  W.  773,  774, 
4  Am.  &  Eng.  Ann.  Cas.  667. 

Michigan. — Fred  Macey  Co.  v. 
Macey,  143  Mich.  138,  152,  106  N. 
W.  722,  727,  5  L.  R.  A.  N.  S.  1036. 

New  Jersey. — Arnold  v.  Searing, 
78  N.  J.  Eq.  146,  157-158,  78  Atl. 
762,  766-767;  See  v.  Heppenheimer, 
69  N.  J.  Eq.  36,  71,  61  Atl.  843. 

Ohio. — Shawnee  Commercial  & 
Savings  Bank  Co.  v.  Miller,  24  Ohio 
C.  C.  198,  210. 

Oregon. — Johnson  v.  Sheridan 
Lumber  Co.,  51  Or.  35,  40,  93  Pac. 
470,  472. 

Virginia. — Jordan  v.  Annex  Cor- 
poration, 109  Va.  625,  629,  64  S.  E. 
1050,  1052,  17  Am.  &  Eng  Ann.  Cas. 
267. 

United  Kingdom  and  Colonies. — 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
1284,  6  Eng.  Rul.  Cas.  777,  39  L.  T. 
N.  S.  269,  27  W.  R.  65;  Bagnall  v. 
Carlton,  L.  R.  6  Ch.  Div.  371,  384, 
386;  Alexandra  Oil  &  Dev.  Co.  v. 
Cook,  11  Ont.  W.  R.  1054,  1059. 

54.  See  post,  chapter  IV. 


PROMOTERS  GENERALLY. 


19 


and  in  what  shape  and  under  what  supervision  it  shall  start  into 
existence  and  begin  to  act  as  a  trading  corporation.  It  is  he  who 
selects  the  directors,  to  whom  he  gives  such  power  as  he  chooses ; 
it  is  he  who  settles  the  regulations  of  the  company,  regulations 
under  which  the  company,  as  soon  as  it  comes  into  existence,  may 
find  itself  bound  to  anything  not  in  itself  illegal,  which  the  pro- 
moter may  have  chosen.  This  control  of  the  promoter  over  the 
company,  so  plenary  and  absolute,  involves  a  correlative  respon- 
sibility, and  out  of  this  responsibility  arises  the  doctrine  now  well 
settled  of  the  fiduciary  relation  of  the  promoter  toward  the  com- 
pany he  creates."  55 

This  fiduciary  obligation  of  the  promoter  extends  to  the  cor- 
poration, to  its  existing  stockholders,  and  to  the  subscribers  for 
its  shares,56  but  not  to  its  bondholders  or  other  creditors.57 


55.  Arnold   v.    Searing,   78   N.   J. 
Eq.  146,  157,  78  Atl.  762,  766.     See 
also    Tegarden    Bros.    v.    Big    Star 
Zinc  Co.,  71  Ark.  277,  281,  72  S.  W. 
989,   991;    Goodwin   v.    Wilbur,   104 
111.  App.  45;  Jordan  v.  Annex  Cor- 
poration, 109  Va.  625,  629,  64  S.  E. 
1050,  1052,  17  Am.  &  Eng.  Ann.  Gas. 
267. 

56.  Alabama. — Moore   v.   Warrior 
Coal  &  Land  Co.,  178  Ala.  234,  59 
So.  219. 

Arizona. — Hughes  v.  Cadena  De- 
Cobre  Min.  Co.,  13  Ariz.  52,  61,  108 
Pac.  231,  234. 

Arkansas. — Tegarden  Bros.  v.  Big 
Star  Zinc  Co.,  71  Ark.  277,  281,  72 
S.  W.  989,  990-991. 

Indiana. — Cushion  Heel  Shoe  Co. 
v.  Hartt,  181  Ind.  167,  103  N.  E. 
1063,  50  L.  R.  A.  N.  S.  979. 

Maine. — Camden  Land  Co.  v. 
Lewis,  101  Me.  78,  95,  63  Atl.  523, 
530. 

Michigan. — Fred     Macey     Co.     v. 


Macey,  143  Mich.  138,  152,  106  N. 
W.  722, 727,  5  L.  R.  A.  N.  S.  1036. 

Ne-w  Jersey. — Woodbury  Heights 
Land  Co.  v.  Loudenslager,  55  N. 
J.  Eq.  78,  88,  35  Atl.  436,  440, 
affirmed,  56  N.  J.  Eq.  411,  41  Atl. 
1115,  but  modified,  58  N.  J.  Eq.  556, 
43  Atl.  671. 

New  York. — Brewster  v.  Hatch, 
122  N.  Y.  349,  362,  25  N.  E.  505,  33 
N.  Y.  St.  Rep.  527. 

Washington. — Mangold  v.  Adrian 
Irr.  Co.,  60  Wash.  286,  290,  111  Pac. 
173,  175. 

United  Kingdom  and  Colonies. 
Lagunas  Nitrate  Co.  v.  Lagunas 
Syndicate,  1899,  2  Ch.  Div.  392, 
422;  In  re  Leeds  &  Hanley  Thea- 
tres of  Varieties,  1902,  2  Ch.  Div. 
809,  824-832. 

See  note  to  Lomita  Land  &  Water 
Co.  v.  Robinson,  18  L.  R.  A.  N.  S. 
1107. 

Heckscher  v.  Edenborn,  203  N. 
Y.  210,  224-225,  96  N.  E.  411,  seems 


20 


THE  LAW  OF  PROMOTERS. 


Whether  this  fiduciary  relation  of  the  promoter  extends  to 
future  subscribers  is  a  question  on  which  the  courts  are  not  en- 
tirely in  accord.  It  is  held  in  many  jurisdictions  that  the  promoter 
stands  in  a  fiduciary  relation,  not  only  to  the  existing  stock- 
holders and  subscribers,  but  to  all  those  whom  the  promoter 
intends  as  a  part  of  the  original  scheme,  to  bring  in  as  sub- 
scribers to  the  company's  shares.58  The  Supreme  Court  of  the 


to  hold  that  the  promoter  does  not 
stand  in  a  fiduciary  relation  to 
one  who,  without  being  solicited, 
asks  permission  to  become  a  sub- 
scriber. 

57.  Banque  Franco-Egyptienne  v. 
Brown,  34  Fed.  Rep.   162,  190-191, 
196;    Donnelly   v.    Baltimore   Trust 
Co.,  102  Md.  1,  29 ;  61  Atl.  301.     See 
also  Cornell  v.  Hay,  L.  R.  8  C.  P», 
Cas.   328. 

58.  Federal. — Yeiser     v.     United 
States  Board  &  Paper  Co.,  107  Fed. 
340,  344,  46  C.  C.  A.  567,  52  L.  R.  A. 
724. 

Arkansas. — Tegarden  Bros.  v.  Big 
Star  Zinc  Co.,  71  Ark.  277,  281,  72 
S.  W.  989,  990-991. 

California. — Burbank  v.  Dennis, 
101  Cal.  90,  98,  35  Pac.  444,  447. 

Indiana. — Cushion  Heel  Shoe  Co. 
v.  Hartt,  181  Ind.  167,  103  N.  E. 
1063,  50  L.  R.  A.  N.  S.  979. 

Maine. — Mason  v.  Carrothers,  105 
Me.  392,  399,  401-402,  74  Atl.  1030, 
1033,  1034;  Camden  Land  Co.  v. 
Lewis,  101  Me.  78,  95,  63  Atl.  523, 
530. 

Massachusetts. — Old  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  203 
Mass.  159,  183,  187,  193,  89  N.  E. 
193,  40  L.  R.  A.  N.  S.  314 ;  Hayward 
v.  Leeson,  176  Mass.  310,  318,  57 
N.  E.  656,  49  L.  R.  A.  725. 


Michigan. — Torrey  v.  Toledo  Port- 
land Cement  Co.,  158  Mich.  348, 
122  N.  W.  614. 

Missouri. — South  Joplin  Land  Co. 
v.  Case,  104  Mo.  572,  579-580,  16  S. 
W.  390,  392,  38  Am.  &  Eng.  Corp. 
Cas.  333. 

New  Jersey. — Plaquemines  Trop- 
ical Fruit  Co.  v.  Buck,  52  N.  J.  Eq. 
219,  232,  233,  27  Atl.  1094,  44  Am. 
&  Eng.  Corp.  Cas.  686. 

Pennsylvania. — Densmore  Oil  Co. 
v.  Densmore,  64  Pa.  43,  50;  Mackey 
Baking  Co.  v.  Mackey,  19  Pa.  Dist. 
Ct.  893,  902. 

Washington. — Mangold  v.  Adrian 
Irrigation  Co.,  60  Wash.  286,  290, 
111  Pac.  173,  175. 

United  Kingdom  and  Colonies — 
In  re  British  Seamless  Paper  Box 
Co.,  L.  R.  17  Ch.  Div.  467,  479; 
In  re  Olympia,  Ltd.,  1898,  2  Ch. 
Div.  153,  175-177,  affirmed  ««& 
nom.  Gluckstein  v.  Barnes,  1900, 
App.  Cas.  240,  257;  New  Som- 
brero Phosphate  Co.  v.  Erlanger,  L. 
R.  5  Ch.  Div.  73,  113,  25  W.  R. 
436,  affirmed  sub  nom.  Erlanger  v. 
New  Sombrero  Phosphate  Co.,  L.  R. 
3  App.  Cas.  1218,  6  Eng.  Rul.  Cas. 
777,  39  L.  T.  N.  S.  269,  27  W.  R. 
65 ;  In  re  Leeds  &  Hanley  Theatres 
of  Varieties,  1902,  2  Ch.  Div.  809, 
823-824;  In  re  Anglo  French  Co- 


PROMOTERS  GENERALLY. 


21 


United  States  has,  however,  refused  to  recognize  this  doctrine.59 
It  seems  to  be  generally  agreed  that  the  trust  relation  of  a  pro- 
moter to  future  stockholders  extends  in  any  event,  only  to  those 
who  acquire  their  shares  from  the  corporation  itself  as  original 
subscribers,  and  not  to  those  who  subsequently  acquire  by  pur- 
chase, shares  originally  issued  to  others.60 

§  15.  Inception  of  the  relation. 

The  question  as  to  when  a  promoter  first  entered  upon  that 
relation  to  the  corporation  may  become  a  matter  of  considerable 
moment,  if  he  has  sold  to  the  corporation,  property  which  he 
acquired  at  about  the  time  that  he  undertook  the  promotion.  In 
such  case  the  question  whether  the  promoter's  transaction  was  a 
proper  one,  the  remedies  open  to  the  corporation,  and  the  measure 
of  its  recovery  may  depend  upon  whether  the  property  was  ac- 


operative  Society,  L.  R.  21  Ch.  Div. 
492,  496-497;  Components  Tube  Co. 
v.  Naylor,  1900,  2  Ir.  R.  1,  71. 

See  post,  §  124,  et  seq. 

A  subsequent  issue  of  shares  not 
contemplated  at  the  time  of  the  or- 
ganization of  the  company  does 
not  extend  the  trust  obligations  of 
the  promoters  to  the  subsequent 
subscribers.  See  post,  §  125. 

59.  Old    Dominion    Copper,    etc., 
Co.    v.    Lewisohn,    210    U.    S.    206, 
215,  28  S.  C.   634,   52  L.   Ed.  1025. 
This  matter  is  discussed  at  length 
in  a  subsequent  chapter.    See  post, 
§§  124-130. 

60.  Mason  v.  Carrothers,  105  Me. 
392,  399,  74  Atl.  1030,  1033. 

See  post,   §§    120-121,   233. 

Of.  Wills  v.  Nehalem  Coal  Co.,  52 
Or.  70,  77,  96  Pac.  528;  Brewster  v. 
Hatch,  122  N.  Y.  349,  25  N.  E.  505, 
33  N.  Y.  St.  Rep.  527. 


If  shares  are  upon  their*  issue, 
transferred  as  a  gift  to  the  trea- 
sury of  the  corporation,  the  pur- 
chasers of  these  treasury  shares 
may  perhaps  be  considered  original 
subscribers.  Hinkley  v.  Sac  Oil  & 
Pipe  Line  Co.,  132  Iowa  396,  107 
N.  W.  629,  119  Am.  St.  R.  564. 
But  see  Parsons  v.  Hayes,  50  N.  Y. 
Super.  29,  14  Abb.  N.  C.  (N.  Y.) 
419;  Watkins  v.  Mills,  114  N.  Y. 
App.  Div.  903,  100  Supp.  1148.  See 
post,  §  127. 

While  the  fiduciary  relation  does 
not  extend  directly  to  persons  who 
acquire  their  stock  otherwise  than 
from  the  company  or  its  treasury, 
the  purchaser  of  shares  stands  in 
some  respects  in  the  shoes  of  his 
vendor,  and  is  entitled  to  some  of 
the  rights  of  the  latter  against  the 
promoters.  Lagunas  Nitrate  Co. 
v.  Lagunas  Syndicate,  1899,  2  Ch. 
Div.  392,  449. 


22 


THE  LAW  OF  PROMOTERS. 


quired  by  the  promoter  before,  or  after,  he  entered  upon  the  trust 
relation.  It,  therefore,  often  becomes  necessary  to  determine  at 
what  precise  moment  the  person  in  question  first  entered  upon  the 
somewhat  indefinite  relation  of  promoter  to  the  corporation. 

There  is,  it  has  been  said,  no  one  decisive  test  of  the  moment 
at  which  the  character  of  promoter  is  assumed.61  That  the 
promoter  may  become  such,  and  subject  himself  to  the  limitations 
of  the  fiduciary  relation,  before  the  corporation  achieves  legal  ex- 
istence, is  not  open  to  doubt.  It  has  been  objected  that  a  pro- 
moter cannot  be  an  "  agent  "  for  a  non-existing  corporation,62 
and  a  similar  difficulty  is  felt  in  calling  him  a  "  trustee."  63  Lord 
Justice  Lindley  remarked  in  Lydney  &  Wigpool  Iron  Ore  Co.  v. 
Bird  64  that  it  is  not  "  much  less  objectionable  to  talk  of  his  being 
in  a  fiduciary  relation  to  the  company  before  the  company  had 


61.  In  re  Olympia,  Ltd.,  1898,  2 
Ch.  Div.  153,  181-182,  affirmed  sub 
worn.    Gluckstein    v.    Barnes,    1900, 
App.   Gas.  240. 

62.  Yale  'Gas   Stove  Co.   v.   Wil- 
cox,  64  Conn.  101,  122,  29  Atl.  303, 
25  L.  R.  A.  90,  42  Am.  St.  Rep.  159, 
47    Am.    &    Eng.    Corp.    Gas.    647; 
Arnold  v.  Searing,  78  N.  J.  Eq.  146, 
157-158,    78   Atl.   762,    767;    Lydney 
&  Wigpool  Iron  Ore  Co.  v.  Bird,  L. 
R.  33  Ch.  Div.  85,  93,  24  Am.  &  Eng. 
Corp.  Gas.  23. 

It  is  said  in  Arnold  v.  Searing, 
supra,  that  the  fiduciary  relationship 
of  the  promoter  to  the  corporation 
is  "  an  extension  of  the  doctrine  of 
agency,  a  sort  of  agency  by  antici- 
pation, for  the  promoter  is  not, 
strictly  speaking,  an  agent  of  or 
trustee  for  the  company  before  in- 
corporation, but  it  is  a  salutary  and 
necessary  fiction  of  equity  for  the 
protection  of  the  company."  See 
also  Jordan  v.  Annex  Corporation, 


109  Va.  625,  64  S.  E.  1050,  17  Am. 
&  Eng.  Ann.  Cas.  267. 

The  promoter  does  not,  strictly 
speaking,  ever  become,  as  such,  the 
agent  of  the  corporation.  Tegarden 
Bros.  v.  Big  Star  Zinc  Co.,  71  Ark. 
277,  281,  72  S.  W.  989,  991.  And 
see  post,  §§  46-^8. 

Promoters  are  spoken  of  as  agents 
in  Simons  v.  Vulcan  Oil  &  Mining 
Co.,  61  Pa.  202,  218,  100  Am.  Dec. 
628. 

63.  In  re  Leeds  &  Hanley  Thea- 
tres of  Varieties,  1902,  2  Ch.   Div. 
809,    819,    822;    Lydney    &    Wigpool 
Iron  Ore  Co.  v.  Bird,  L.  R.  33  Ch. 
Div.   85,   94,   24   Am.   &   Eng.   Corp. 
Cas.  23;  Cuba  Colony  Co.  v.  Kirby, 
149  Mich.  453,  457,  112  N.  W.  1133, 
1135;   Arnold  v.   Searing,   78  N.   J. 
Eq.  146,  157-158,  78  Atl.  762,  766- 
767. 

64.  L.  R.  33  Ch.  Div.  85,  93,  24 
Am.   &  Eiig.   Corp.   Cas.   23,  quoted 
in  Cuba   Colony  Co.  v.   Kirby,  149 


PROMOTERS  GENERALLY. 


23 


any  existence."  The  difficulty  is,  however,  merely  one  of  terms, 
for  in  all  of  these,  and  in  numerous  other  cases,  the  fact  that  the 
fiduciary  relation  of  the  promoter  can,  and  does,  arise  before  the 
corporation  has  acquired  existence,  is  fully  conceded.65 

§  16.  The  same  subject. — Purchase  of  property  with  view  to 

resale  to  corporation. 

The  purchase  of  property  with  a  view  to  its  resale  to  a  corpo- 
ration to  be  formed,  does  not,  though  the  plan  be  subsequently 
fully  carried  out,  constitute  the  purchaser  a  promoter  of  the 
company  as  of  the  time  of  the  original  purchase,  for  the  mere  con- 
templation of  the"  organization  of  a  corporation  is  not,  of  itself, 
sufficient  to  create  that  relation.66  This  is  so,  even  though  the 


Mich.  453,  457,  112  N.  W.  1133, 
1135. 

65.  Federal. — Commonwealth  S. 
S.  Co.  v.  American  Shipbuilding  Co., 
197  Fed.  797,  804,  affirmed,  215  Fed. 
Rep.  296,  131  C.  C.  A.  596. 

California. — Burbank  v.  Dennis, 
101  Cal.  90,  97,  98,  35  Pac.  444,  446, 
447 ;  California-Gala  veras  Mining 
Co.  v.  Walls, —  Cal.  — ,  149  Pac. 
595. 

Illinois. — Mississippi  Lumber  Co. 
v.  Joice,  176  111.  App.  110,  120. 

Massachusetts. — Old  -Dominion 
Copper  Mining,  etc.,  Co.  v.  Bigelow, 
203  Mass.  159,  177,  89  N.  E.  193, 
201,  40  L.  R.  A.  N.  S.  314. 

Missouri. — South  Joplin  Land  Co. 
v.  Case,  104  Mo.  572,  580,  16  S.  W. 
390,  392,  38  Am.  &  Eng.  Corp.  Gas. 
333. 

New  York. — Brewster  v.  Hatch, 
122  N.  Y.  349,  362,  25  N.  E.  505, 
33  N.  Y.  St.  Rep.  527. 

United  Kingdom  and  Colonies. — 
Emma  Silver  Mining  Co.  v.  Lewis, 
L.  R.  4  C.  P.  D.  396,  407;  Hichens 


v.  Congreve,  4  Sim.  420,  427;  Bag- 
nail  v.  Carlton,  L.  R.  6  Ch.  Div. 
371,  384;  Twycross  v.  Grant,  L.  R. 
2  C.  P.  D.  469,  527;  Cover's  Case, 
L.  R.  1  Ch.  Div.  182,  187,  affirming, 
L.  R.  20  Eq.  114;  Gluckstein  v. 
Barnes,  1900,  App.  Gas.  240,  249, 
256,  affirming,  In  re  Olympia,  Ltd., 
1898,  2  Ch.  Div.  153;  Alexandra 
Oil  &  Dev.  Co.  v.  Cook,  11  Ont. 
W.  R.  1054,  1059. 

See  also  cases  cited  in  notes  62, 
63,  and  64. 

See  contra  Stewart  v.  St.  Louis 
Ft.  S.  &  W.  R.  Co.,  41  Fed.  Rep. 
736,  738. 

It  is  said  in  Gluckstein  v.  Barnes, 
1900  App.  Gas.  240,  that  the  pro- 
moter stands  before  the  company 
is  formed  in  a  fiduciary  position 
towards  it  for  some,  but  not  for 
all,  purposes. 

66.  Connecticut. — Yale  Gas  Stove 
Co.  v.  Wilcox,  64  Conn.  101,  115, 
29  Atl.  303,  25  L.  R.  A.  90,  42  Am. 
St.  Rep.  159,  47  Am.  &  Eng.  Corp. 
Cas.  647. 


24 


THE  LAW  OF  PROMOTERS. 


parties  to  the  purchase  a-gree  that  the  purchaser  shall  organize 
a  corporation  to  take  over  the  property  and  pay  the  purchase 
price,  or  some  part  thereof,  in  the  shares  of  the  company  to  be 
formed.67 

The  purchaser  does,  it  seems,  enter  upon  the  relation  of  pro- 
moter to  the  corporation  if  he  makes  his  purchase,  not  for  him- 
self, but  on  behalf  of  the  contemplated  corporation.68  He  will,  at 
any  rate,  be  held  to  have  acted  for  the  company  in  the  trans- 


Massachusetts. — Old  Dominion 
•Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  321,  74  N.  E.  653,  655, 
108  Am.  St.  Rep.  479. 

Michigan. — Cuba  Colony  Co.  v. 
Kirby,  149  Mich.  453,  455-456,  112 
N.  W.  1133,  1134. 

New  Jersey. — Plaquemines  Trop- 
ical Fruit  Co.  v.  Buck,  52  N.  J.  Eq. 
219,  230,  233,  27  Atl.  1094,  44  Am. 
&  Eng.  Corp.  Gas.  686;  Woodbury 
Heights  Land  Co.  v.  Loudenslager, 
55  N.  J.  Eq.  78,  90,  35  Atl.  436, 
affirmed,  56  N.  J.  Eq.  411,  41  Atl. 
1115,  but  modified,  58  N.  J.  Eq. 
.556,  43  AtL  671. 

United  Kingdom  and  Colonies. — 
*  Cover's  Case,  L.  R.  1  Ch.  Div. 
182,  affirming,  L.  R.  20  Eq.  114; 
LNew  Sombrero  Phosphate  Co.  v. 
Erlanger,  L.  R.  5  Ch.  Div.  73,  91, 
25  W.  R.  536,  affirmed  ««&  nom. 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Gas.  1218, 
1234-1235,  1242-1243,  1255,  6  Eng. 
Hul.  Gas.  777,  39  L.  T.  N.  S.  269, 
27  W.  R.  65;  Ladywell  Mining  Co. 
<v.  Brookes,  L.  R.  35  Ch.  Div.  400, 
409,  412,  415,  17  Am.  &  Eng.  Corp. 
Gas.  22,  affirming,  L.  R.  34  Ch. 
Div.  398 ;  In  re  Hess  Manufacturing 
Co.,  23  Can.  S.  C.  644,  660,  et  seq., 
affirming,  21  Ont.  App.  66,  revers- 


ing, 23  Ont.  182.  See  also  Burland 
v.  Earle,  1902,  App.  Gas*  83,  98-99. 

See  contra  a  dictum  in  Central 
Trust  Co.  v.  East  Tennessee  Land 
Co.,  116  Fed.  Rep.  743,  748. 

The  language  of  the  court  in  Re 
Leeds  &  Hanley  Theatres  of  Vari- 
eties, 1902,  2  Ch.  Div.  809  at  p. 
822  may  seem  to  the  contrary.  If 
so,  it  is  dicta,  for  it  was  wholly 
unnecessary  for  the  decision  of  the 
case,  to  determine  that  the  Finance 
Company  became  a  "  promoter " 
before  the  organization  of  the  Leeds 
&  Hanley  Theatres  of  Varieties. 

67.  Yale  Gas   Stove   Co.   v.   Wil- 
cox,  64  Conn.  101,  115,  29  Atl.  303, 
25  L.  R.  A.  90,  42  Am.  St.  Rep.  159, 
47    Am.    &    Eng.    Corp.    Gas.    647; 
Plaquemines  Tropical  Fruit  Co.   v. 
Buck,  52  N.  J.  Eq.  219,  234,  27  Atl. 
1094,  44  Am.  &  Eng.  Corp.  Gas.  686; 
Woodbury    Heights    Land    Co.     v. 
Loudenslager,  55  N.   J.  Eq.  78,  91, 
35   Atl.  436,   affirmed   56  N.   J.   Eq. 
411,  41  Atl.  1115,  but  modified,  58 
N.  J.  Eq.  556,  43  Atl.  671.     Cover's 
Case,    L.    R.    1   Ch.    Div.   182,    197, 
affirming,  L.  R.  20  Eq.  114;   Lady- 
well  Mining  Co.  v.  Brookes,  L.   R. 
35  Ch.  Div.  400,  412,  17  Am.  &  Eng. 
Corp.  Gas.  22. 

68.  See  Cover's  Case,  L.  R.  1  Ch. 


PROMOTERS  GENERALLY. 


25 


action,  and  be  compelled  to  give  to  it,  when  formed,  the  full 
benefit  of  his  purchase.69  Whether  the  purchase  was  in  fact 
made  by  the  promoter  for  himself  individually,  or  for  the  corpo- 
ration to  be  formed,  is  often  a  question  of  some  nicety.70  A  mat- 
ter of  considerable,  though  not  of  controlling,  importance  in  the 
determination  of  this  question,  is  the  circumstance  that  the  pur- 
chase price  is  afterwards  actually  paid,  not  with  moneys  of  the 
promoter,  but  in  the  shares,  or  out  of  the  funds,  of  the  company,71 
or  with  moneys  contributed  by  a  syndicate  organized  for  the  pur- 
pose, the  members  of  which  are  repaid  by  a  pro  rat  a  distribution 
of  the  shares  of  the  subsequently  organized  corporation.72 

§  17.  The  same  subject. — Taking  step  in  organization  of  the 

corporation. 

The  relation  of  promoter  to  the  corporation  arises  when  the 
parties  actually  enter  upon  its  organization,73  that  is,  when  they 


Dlv.  182,  187;  Bagnall  v.  Carlton, 
L.  R.  6  Ch.  Div.  371,  405-407.  And 
see  post,  §  162n.  Cf.  In  re  Leeds  & 
Hanley  Theatres  of  Varieties,  1902, 
2  Ch.  Div.  809,  821-822. 

69.  Minister  of  Rys.  &  Canals  v. 
Quebec    South    Ry.    Co.,    12    Exch. 
Rep.  of  Can.  11,  24.    See  cases  cited 
in  succeeding  notes.     And  see  Miss- 
issippi Lumber  Co.  v.  Joice,  176  111. 
App.  110,  118. 

70.  It  is  said  to   be  a   question 
of  fact,  in  Omnium  Electric  Palaces 
Lim.  v.  Raines,  1914,  1  Ch.  Div.  332, 
347,  82  L.  J.  Ch.  N.  S.  519,  526,  109 
L.  T.  N.  S.  206. 

71.  Yale  Gas   Stove  Co.   v.   Wil- 
cox,  64  Conn.  101,  116-117,  29  Atl. 
303,  25  L.  R.  A.  90,  42  Am.  St.  Rep. 
159,  47  Am.  &  Eng.  Corp.  Gas.  647; 
Plaquemines  Tropical   Fruit  Co.   v. 
Buck,  52  N.  J.  Eq.  219,  233-235,  27 
Atl.  1094,  44  Am.  &  Eng.  Corp.  Gas. 


686;  Woodbury  Heights  Land  Co.  v. 
Loudenslager,  55  N.  J.  Eq.  78,  91, 
35  Atl.  436,  affirmed,  56  N.  J.  Eq. 
411,  41  Atl.  1115,  but  modifled,  58 
N.  J.  Eq.  556,  43  Atl.  671.  Lady- 
well  Mining  Co.  v.  Brookes,  L.  R.  35 
Ch.  Div.  400,  409-111,  17  Am.  & 
Eng.  Corp.  Cas.  22;  same  v.  same, 
L.  R.  34  Ch.  Div.  398,  407. 

72.  Parker  v.  Boyle,  178  Ind.  560, 
99  N.  E.  986;  Bigelow  v.  Old   Do- 
minion Copper,  etc.,  Co.,  74  N.  J. 
Eq.   457,   503,    71    Atl.    153;    Arnold 
v.  Searing,  78  N.  J.  Eq.  146,  159,  160, 
78  Atl.  762,  767;  Arnold  v.  Searing, 
73  N.  J.  Eq.  262,  67  Atl.  831 ;  Alex- 
andra  Oil  &  Dev.  Co.   v.  Cook,  11 
Ont.   W.  R.  1054. 

73.  Yeiser    v.     U.     S.     Board    & 
Paper  Co.,  107  Fed.  Rep.  340,  348, 
46  C.  C.  A.   567,  52  L.   R.   A.  724; 
South  Joplin  Land  Co.  v.  Case,  104 
Mo.   572,   580,   16   S.    W.   390,   392, 


26 


THE  LAW  OF  PROMOTERS. 


take  the  first  decisive  step,  or  perform  the  first  overt  act,  in  the 
carrying  out  of  the  plan  of  organization.74  The  chronological 
order  of  the  steps  in  the  organization  of  a  corporation,  varies  in 
different  cases,  and,  as  the  first  step  creates  the  relation,  there 
is  no  one  act  from  which  the  relation  uniformly  dates.75  The 
moment  at  which  the  relation  has  its  inception  depends  upon  the 
facts  of  each  particular  case,76  and  the  burden  of  proof  .rests  upon 
the  party  affirming  the  existence  of  the  fiduciary  relation.77 

The  filing  of  a  certificate  of  incorporation  is  an  active  step  in 
the  organization  of  the  company  sufficient  to  mark  the  inception 
of  the  relation  of  promoter  to  the  corporation,  anct  so,  no  doubt, 
is  the  preparation  of  such  certificate,  and  perhaps  even  the  em- 
ployment of  attorneys  to  prepare  it. 

The  solicitation  of  subscriptions  to  the  shares  of  the  proposed 
company  is  an  act  sufficient  to  create  the  relation,78  even  though 
there  be  nothing  more  than  a  mere  informal  invitation  to  subscribe 
for  shares,  extended  before  any  written  subscription  agreement 


38  Am.  &  Eng.  Corp.  Gas.  333; 
Shawnee,  etc.,  Savings  Bank  Co.  v. 
Miller,  24  Ohio  C.  C.  198,  211; 
Densmore  Oil  Co.  v.  Densmore,  64 
Pa.  St.  43,  50;  Twycross  v.  Grant, 
L.  R.  2  C.  P.  D.  469,  527. 

74.  Milwaukee  Cold   Storage  Co. 
v.   Dexter,  99  Wis,  214,  230,  74  N. 
W.  976,  40  L.  R.  A.  837,  842 ;  Gluck- 
stein    v.    Barnes,    1900    App.    Cas. 
240,  256. 

75.  See    In    re    Olympia,     Ltd., 
1898,  2  Ch.  Div.  153,  181-182,  (affir- 
med sub  nom.  Gluckstein  v.  Barnes, 
1900  App.  Cas.  240)  ;  citing  Emma 
Silver   Mining  Co.   v.  Lewis,  L.   R. 
4  C.  P.  D.  396. 

76.  Yale      Gas      Stove      Co.      v. 
Wilcox,   64  Conn.   101,   116-118,   29 
Atl.  303,  25  L.  R.  A.  90,  42  Am.  St. 
Rep.    159,    47    Am.    &    Eng.    Corp. 


Cas.  647;  Ladywell  Mining  Co.  v. 
Brookes,  L.  R.  35  Ch.  Div.  400, 
415,  17  Am.  &  Eng.  Corp.  Cas.  22. 

77.  Ladywell      Mining      Co.      v. 
Brookes,    L.    R.    35    Ch.    Div.    400, 
411,  17  Am.  &  Eng.  Corp.  Cas.  22. 
See  same  v.  same,  L.  R.  34  Ch.  Div. 
398,   409-410. 

78.  Burbank  v.  Dennis,  101  Cal. 
90,    97,    35    Pac.    444,    446;    South 
Joplin  Land  Co.   v.   Case,   104   Mo. 
572,  581,  16  S.  W.  390,  393,  38  'Am. 
&    Eng.   Corp.    Cas.   333;    Ladywell 
Mining  Co.  v.  Brookes,  L.  R.  35  Ch. 
Div.  400,  411,  415,  17  Am.   &  Eng. 
Corp.   Cas.   22;    Foss   v.    Harbottle, 
2  Hare  461,  489;   Highway  Adver- 
tising   Co.    v.    Ellis,    7    Ont.    L.    R. 
504,   508,   citing  In  re    Hess   Man- 
ufacturing Co.,  21  Ont.  App.  66,  67, 
affirmed,  23  Can.  S.  C.  644. 


PROMOTERS  GENERALLY.  27 

has  been  prepared.79  If,  however,  the  invitation  to  take  shares 
in  the  proposed  corporation  is  declined,  and  the  corporation  then 
in  contemplation  is  abandoned,  the  moving  party  may  purchase 
the  contemplated  property  for  his  own  account.  Though  he 
afterward  revives  his  plan  of  forming  a  corporation,  and  this  time 
successfully  solicits  the  parties  who  at  first  refused  to  join  him, 
he  will  not  be  held  to  have  been  a  promoter  from  the  time  he 
first  solicited  the  subscription,  but  will  be  treated  as  having  ac- 
quired the  property  at  a  time  when  he  was  not  subject  to  any 
fiduciary  obligations.80 

If  the  promoter  acquired  property  at  a  time  when  he  had  al- 
ready entered  upon  that  relation  to  the  corporation,  a  mere 
change  in  the  details  of  the  organization  of  the  contemplated 
company  is  not  an  abandonment  of  the  scheme  such  as  to  enable 
the  promoter  to  disavow  the  trust  relation  and  maintain  that  the 
.property  was  thereafter  held  by  him  for  his  individual  account. 
It  has  been  held  that  the  organization  of  the  corporation  under 
the  statutes  of  a  state  other  than  that  mentioned  in  the  prospectus, 
is  not  an  abandonment  of  the  originally  planned  company;  that 
the  company  organized  is  still  the  company  mentioned  in  the 
prospectus  and  that  it  is  entitled  to  the  benefit  of  any  purchase 
made  for  its  account.81 

§  18.  The  same  subject. — An  illustrative  case. 

In  Gluckstein  v.  Barnes,82  a  syndicate  had  been  formed  to  buy 
and  resell  a  place  of  entertainment  known  as  "  Olympia."  The 
secretary  of  the  syndicate,  before  the  purchase,  entered  into  an 
agreement  with  one  Gluckstein,  reciting  that  the  syndicate  pro- 
posed to  purchase  "  Olympia  "  with  a  view  to  its  resale  to  a  com- 

79.  Burbank  v.  Dennis,  101  Cal.      Atl.  1094,  1099-1100,  44  Am.  &  Eng. 
90,  96,  97,  35  Pac.  444,  446.  Corp.  Cas.  686.    But  see  post,  §  73, 

80.  Craig  v.  Phillips,  L.  R.  3  Ch.      note  14. 

Div.   722,   723,   725.  82.  1900  App.  Cas.  240,  241,  256- 

81.  Plaquemines    Tropical    Fruit      257,  affirming,  In  re  Olympia,  1898, 
Co.  v.  Buck,  52  N.  J.  Eq.  219,  235,  27      2  Ch.  Div.  153. 


28  THE  LAW  OF  PROMOTERS. 

pany  to  be  formed,  or  to  some  other  purchaser,  and  stating  that 
if  the  company  was  formed,  Gluckstein  and  three  other  persons 
named,  all  of  whom  were  members  of  the  syndicate,  had  consented 
to  become  directors  of  the  proposed  company,  and  that  these 
four  persons  should  be  trustees  for  the  syndicate,  with  power  to 
buy  and  resell  "  Olympia,"  and  to  promote  and  register  the  in- 
tended company.  The  court  said  that  "  where  speculators  have 
formed,  exclusively  of  themselves,  the  directorate  of  a  company 
to  be  immediately  floated  for  the  purpose  of  buying  the  property 
which  those  same  individuals  are  associated  to  acquire  and  resell " 
they  have  taken  a  decisive  step  in  shaping  and  limiting  the  com- 
pany, and  that  this  is  certainly  an  act  of  promotion.83  It  was 
claimed  that  the  gentlemen  forming  the  syndicate  might  have 
changed  their  minds  and  sold  "  Olympia  "  to  an  individual,  but 
the  court  held  that  while  this  was  true  in  the  sense  that  until 
the  registration  of  the  company,  and  a  binding  contract  with  it, 
the  parties  were  free  to  change  their  minds ;  true  in  the  sense  in 
which  every  enterprise  not  actually  consummated  may  be  aban- 
doned; still  the  fact  remained  that  these  men  intended  to  sell  to 
the  proposed  company,  that  they  did  carry  out  that  intention, 
and  that  the  proposed  directors  stood  in  a  fiduciary  relation  to 
the  company  from  the  moment  that  they  had  been  provisionally 
appointed.84 

§  19.  Termination  of  the  relation. 

The  obligations  of  the  promoter  ordinarily  continue*  until  the 
capital  stock  has  been  issued  and  the  corporation  provided  with  a 
board  of  directors  capable  of  protecting  its  interests.85  The  time 

83.  On  this  point  see  also  Hich-  Hitchcock    v.    Hustace,    14    Hawaii 
ens  v.  Congreve,  4  Sim.  420,  427.  232,  241-242;     Hutchinson  v.  Simp- 

84.  As  to  this,  see  also  Bagnall  son,  92  N.  Y.  App.  Div.  382,  421,  87 
v.  Carlton,   L.   R.   6   Ch.   Div.   371,  Supp.     369     (dissenting     opinion) ; 
406-407.  Pietsch   v.   Milbrath,   123  Wis.  647, 

85.  Yeiser  v.  U.  S.  Board  &  656-657,  101  N.  W.  388,  391,  102  N. 
Paper  Co.,  107  Fed.  Rep.  340,  348,  W.  342,  68  L.  R.  A.  945,  107  Am. 
46  C.  C.  A.  567,  52  L.  R.  A.  724 ;  St.  Rep.  1017 ;  Emma  Silver  Mining 


PROMOTERS  GENERALLY.  29 

at  which  the  relation  terminates  depends  to  some  extent  upon  the 
circumstances  of  the  particular  case.86  It  was  said  in  a  recent 
case  8T  that  "  the  fiduciary  relation  must  in  reason  continue  until 
the  promoter  has  completely  established  according  to  his  plan 
the  being  which  he  has  undertaken  to  create.  His  liability  must 
be  commensurate  with  the  scheme  of  promotion  on  which  he  has  em- 
barked. If  the  plan  contemplates  merely  the  organization  of  the 
corporation  his  duties  may  end  there.  But  if  the  scheme  is  more 
ambitious  and  includes  beside  the  incorporation,  not  only  the  con- 
veyance to  it  of  property  but  the  procurement  of  a  working  capi- 
tal in  cash  from  the  public,  then  the  obligation  of  faithfulness 
stretches  to  the  length  of  the  plan.  It  would  be  a  vain  thing  for 
the  law  to  say  that  the  promoter  is  a  trustee  subject  to  all  the 
stringent  liabilities  which  inhere  in  that  character  and  at  the 
same  time  say  that,  at  any  period  during  his  trusteeship  and  long 
before  an  essential  part  of  it  was  executed  or  his  general  duty  as 
such  ended,  he  could,  by  changing  for  a  moment  the  cloak  of  the 
promoter  for  that  of  director  or  stockholder,  by  his  own  act 
alone,  absolve  himself  from  all  past,  present  or  future  liability  in 
his  capacity  as  promoter." 

When  once  the  labors  of  the  promoter,  as  such,  have  been  com- 
pleted and  the  corporation  is  fully  organized  and  given  over  to 
the  control  of  its  stockholders  and  directors,  the  obligations  of 
the  promoter  come  to  an  end,  and  he  is  in  his  subsequent  dealings 
with  the  company  not  subject  to  any  fiduciary  obligations.88 

Co.  v.  Lewis,  L.  R.  4  C.  P.  D.  396,  88.  Iowa  Drug  Co.  v.  Souers,  139 

407 ;  and  see  In  re  Barry  Ry.  Co.,  Iowa  72,  117  N.  W.  300,  19  L.  R.  A. 

L.  R.  4  Ch.  Div.  315,  323.  N.  S.  115 ;  Russell  v.  Rock  Run  Fuel 

86.  Twycross  v.   Grant,   L.   R.   2  Gas   Co.,    184   Pa.  102,   39   Atl.   21. 
C.  P.  D.  469,  541.  7  Am.  &  Eng.  Corp.  Cas.  N.  S.  456; 

87.  Old  Dominion  Copper,  etc.,  Co.  Lagunas    Nitrate    Co.    v.    Lagunas 
v.  Bigelow,  203  Mass.   159,  188,  89  Syndicate,  1899,  2  Ch.  D.  392,  432. 
N.  E.  193,  40  L.  R.  A.  N.  S.  314. 


CHAPTER  II. 

OF  AGREEMENTS  FOE  THE  PROMOTION  OF  CORPORATIONS. 

Section   20.  Introductory. 

21.  Validity  of  agreements  to  organize  corporation  to  purchase 
specific  property. 

22.  Unenforceable  agreements. 

23.  Validity  of  agreements  for  employment. 

24.  Invalid  agreements  for  employment. 

25.  Validity  of  agreements  for  election  of  officers. 

26.  Agreements  for  division  of  shares. 

27.  Agreements  for  control  of  corporation. 

28.  Property  rights  pending  promotion. 

29.  Promoters'  certificates. 

30.  Interpretation   of   agreements   for    sale   of   property   to   cor- 
poration. 

31.  Performance    of    agreements    for    sale    of    property    to    cor- 
poration. 

32.  Donating  shares  to  the  treasury. 

33.  Interpretation    of    agreements    relating    to   promoter's    com- 
pensation. 

34.  Interpretation  of  agreements  for  division  of  profits  of  pro- 
motion, or  shares  of  corporation. 

35.  Interpretation  of  agreements  restricting  sale  of  shares. 

§  20.  Introductory. 

A  corporation,  unless  it  is  in  its  inception  a  strictly  one  man 
concern,  is  necessarily  formed  as  the  result  of  some  preliminary 
agreement  or  understanding.  The  promoters  are,  in  many  in- 
stances, themselves  the  sole  parties  to  the  preliminary  agreement. 
The  preliminary  agreements  do,  however,  frequently  include  con- 
tracts with  persons  whose  property  is  to  be  sold  to  the  corporation, 

with  persons  to  be  employed  by  it,  or  with  persons  in  some  other 

(30) 


AGREEMENTS  FOR  PROMOTION.  31 

manner  interested  in  the  enterprise.  The  agreements  may  deter- 
mine, not  only  the  general  plan  under  which  the  corporation  is  to 
be  organized,  but  the  property  to  be  acquired  by  it,  the  price, 
terms  and  conditions  of  its  purchase,  the  nature  of  the  business 
to  be  carried  on,  the  manner  in  which  it  is  to  be  conducted,  the 
officers  and  managers  by  whom  it  is  to  be  controlled,  and  the 
distribution  to  be  made  of  the  share  capital.  Questions  as  to  the 
validity,  interpretation  and  performance  of  such  agreements  nec- 
essarily arise.  Agreements  of  this  character  are,  of  course,  gov- 
erned by  the  rules  of  law  applicable  to  contracts  generally.  A 
few  questions  which  have  peculiar  application  to  contracts  for  the 
promotion  of  corporations  must,  however,  be  briefly  considered.1 

§  21.  Validity  of  agreements  to  organize  corporation  to  purchase 

specific  property. 

It  has  sometimes  been  urged  that  an  agreement  to  promote  a 
corporation  which  shall  purchase  some  particular  property,  upon 
stated  terms,  is  invalid  as  interfering  with  the  free  exercise  of  the 
judgment  of  the  directors  of  the  fully  organized  company. 
Agreements  of  this  character  are,  however,  while  not  binding  upon 

1.  In  re  Worthington,  1914,  2  K.  shares  at  par  within  ten  days  from 
B.  299,  83  L.  J.  K.  B.  885, 110  L.  T.  N.  the  date  of  the  agreement,  for  a 
S.  599,  one  Worthington  had  made  further  25,000  shares  before  March 
an  agreement  with  Pathg  Freres  31st,  1913,  and  for  a  further  45,000 
by  which  he  undertook  within  shares  on  or  before  December  31st, 
seven  days  from  the  date  thereof  1913.  Worthington  died  in  Feb- 
( November  30th,  1912)  to  orga-  ruary,  1913,  and  Pathes  Freres  filed 
nize  an  English  corporation  for  the  a  claim  against  his  estate  for 
exclusive  sale  in  the  United  King-  damages  suffered  by  reason  of  the 
dom  of  the  cinematograph  machines  failure  of  Worthington,  his  execu- 
and  films  of  PathS  Freres,  such  com-  tors  and  administrators,  to  perform 
pany  to  have  a  capital  of  £105,000.  his  contract.  It  was  held  that 
consisting  of  100,000  ordinary  shares  Worthington's  contract  was  not  of 
of  £1.  each  and  100,000  participa-  such  a  personal  nature  as  to  be  ter- 
tion  shares  of  Is.  each.  Worthing-  minated  by  his  death,  and  that 
ton .  further  undertook  to  procure  Path6  Freres  were  entitled  to  re- 
subscriptions  for  25,000  ordinary  cover  damages  from  his  estate. 


32  THE  LAW  OF  PROMOTERS. 

the  corporation,2  held  to  be  valid  as  between  the  parties,  and 
enforceable  against  them.3  It  has  been  said  that  such  an  agree- 
ment "  is  to  be  construed  as  relating  to  the  formation  of  a  corpo- 
ration upon  a  lawful  and  honest  basis,  and  it  will  not  be  assumed 
as  matter  of  law  that  it  was  within  the  intention  of  the  parties 
to  organize  a  corporation,  and  have  its  stock  issued  in  exchange 
for  the  property  and  rights  of  the  plaintiff  unless  the  directors  or 
stockholders  of  the  corporation  should  approve  and  ratify,  after 
inquiry,  the  scheme  as  detailed  in  the  contract."  4 

It  is  perhaps  difficult  seriously  to  believe  that  parties  who  have 
entered  into  a  formal  agreement  to  organize  a  corporation  to  take 
over  certain  specified  properties  at  an  agreed  price,  actually  intend 
that  the  matter  of  the  consummation  of  their  plan  is  to  be  left 
to  the  untrammelled  discretion  of  the  directors  of  the  fully  organ- 
ized company.  The  promoters  in  almost  every  case  in  fact  in- 
tend to  take  no  chances  with  their  board  of  directors,  and  to  see 
to  it  that  the  personnel  of  the  board  shall  be  such  that  no  repudi- 
ation of  the  preliminary  contract  need  be  feared.  It  must  be  con- 
ceded that  agreements  of  this  character  generally  do,  in  effect, 
fetter  in  advance  the  judgment  of  the  directors,  and,  from  a 
theoretical  point  of  view,  their  validity  might  well  be  questioned. 

Few  corporations,  however,  are,  or  could  be,  organized  without 
some  preliminary  understanding  as  to  the  property  to  be  acquired, 
and  the  price  and  terms  and  conditions  of  the  purchase,  and  where 
the  transaction  is  an  honest  one,  and  there  is  no  intention  to  de- 
fraud the  subscribers,  such  agreements  are  properly  held  valid 
and  enforceable  between  the  parties. 

§  22.  Unenforceable  agreements. 

A  contract  for  the  organization  of  a  corporation  is  void  and 

2.  Stowe  v.  Flagg,  72  111.  397 ;  and      Co.  v.   Smith,  113  N.  Y.  App.  Div. 
see  post,  §§  46,  et  seq.  615,   99   N.   Y.    Supp.   37;   Marie  v, 

3.  King  v.  Barnes,  109  N.  Y.  267,      Garrison,  83  N.  Y.  14. 

16  N.  E.  332 ;  Lorillard  v.  Clyde,  86  4.  Electric  Fire  Proofing  Co.  v, 
N.  Y.  384 ;  .Electric  Fire  Proofing  Smith,  113  N.  Y.  App.  Div.  615,  623, 

99  N.  Y.  Supp.  37. 


AGREEMENTS  FOR  PROMOTION. 


33 


unenforceable  if  the  purpose  of  the  parties  is,  or  the  successful 
carrying  out  of  their  plan  would  necessarily  result  in,  the  perpe- 
tration of  a  fraud  upon  future  subscribers  or  upon  the  public 
in  general.5 

The  agreement  is  likewise  void  if  it  provides  for  the  issue  of 
shares  in  violation  of  the  statute  of  the  domicile  of  the  contem- 
plated corporation.6  If  the  promoter's  agreement  is  in  violation  of 
the  statutes  of  the  state  where  one  would  naturally  expect  the  cor- 


5.  Jackson    v.    McLean's    Execu- 
tors,  100  Mo.    130,   13   S.  W.   393; 
Lorillard   v.    Clyde,    86  N.    Y.   384, 
388;  Duvergier  v.   Fellows,  5  Bing 
248. 

See  Holman  v.  Thomas,  171  Fed. 
Rep.  219,  reversed,  178  Fed.  Rep. 
675,  102  C.  C.  A.  175. 

6.  Federal. — Altenberg    v.    Grant, 
85  Fed.  Rep.  345,  29  C.  C.  A.  185, 
52   U.   S.   App.   568.     Cf.   Krohn  v. 
Williamson,     62     Fed.     Rep.     869, 
affirmed,    sub    nom.    Williamson    v. 
Krohn,  66  Fed.  Rep.  655,  13  C.  C. 
A.  668,  31  U.  S.  App.  325. 

Alabama. — Williams  v.  Evans,  87 
Ala.  725,  6  So.  702,  6  L.  R.  A.  218. 

Kentucky. — Bennett  v.  Stuart,  161 
Ky.  264,  170  S.  W.  642. 

Massachusetts. — Maine  v.  Butler, 
130  Mass.  196. 

Missouri. — Garrett  v.  Kansas  City 
Coal  Min.  Co.,  113  Mo.  330,  20  S.  W. 
965,  35  Am.  St.  R.  713. 

New  Jersey. — Volney  v.  Nixon,  68 
N.  J.  Eq.  605,  60  Atl.  189,  affirming, 
67  N.  J.  Eq.  457,  58  Atl.  75;  Easton 
Natl.  Bk.  v.  American  Brick  Co., 
70  N.  J.  Eq.  722,  728,  64  Atl.  1095, 
1098;  Bigelow  v.  Old  Dominion 
Copper,  etc.,  Co.,  74  N.  J.  Eq.  457, 


515-6,  71  Atl.  153,  177;  Tooker  v. 
National  Sugar  Refining  Co.,  80  N. 
J.  Eq.  305,  321,  84  Atl.  10;  Strick- 
land v.  National  Salt  Co.,  77  N.  J. 
Eq.  328,  76  Atl.  1048,  affirmed,  79 
N.  J.  Eq.  182,  223,  81  Atl.  828,  832. 
And  see  Edgerton  v.  Electric  Imp., 
etc.,  Co.,  50  N.  J.  Eq.  354,  24  Atl. 
540 ;  State  ex  rel.  Morton  v.  Timken, 
48  N.  J.  Law  87,  2  Atl.  783,  12  Am. 
&  Eng.  Corp.  Gas.  34. 

Oklahoma. — Webster  v.  Webster 
Ref.  Co.,  36  Okla.  168,  128  Pac.  261. 

Wisconsin. — Clarke  v.  Lincoln 
Lumber  Co.,  59  Wis.  655,  18  N.  W.. 
492. 

Thompson  on  Corporations  (2nd! 
Ed.),  §  3916.  Clarke  &  Marshall! 
on  Private  Corporations,  §  395-b. 

Cf.  Leeds  v.  Townsend,  228  III. 
451,  81  N.  E.  1069,  13  L.  R.  A.  N.  S. 
191,  where  no  violation  of  a  statu- 
tory provision  was,  however,  In- 
volved, also  Hunter  Smokeless  Pow- 
der Co.  v.  Hunter,  100  N.  Y.  App. 
Div.  191,  91  Supp.  620,  where  the 
question  does  not  seem  to  have  been 
raised.  Also  Krohn  v.  Williamson, 
62  Fed.  Rep.  869,  affirmed,  sub  nom. 
Williamson  v.  Krohn,  66  Fed.  Rep. 
655,  13  C.  C.  A.  668,  31  U.  S.  App. 
325. 


34  THE  LAW  OF  PROMOTERS. 

poration  to  be  organized,  the  courts  will  not,  in  order  to  uphold 
the  agreement,  assume  that  the  company  was  intended  to  be 
organized  under  the  laws  of  some  other  state  where  the  scheme 
set  forth  in  the  agreement  would  be  found  lawful.7  If  a  contract 
for  the  promotion  of  a  corporation,  valid  when  made,  is  rendered 
invalid  by  a  statute  enacted  pending  the  consummation  of  the 
agreement,  the  parties  may,  and  should,  refuse  to  perform,  and  do 
not  subject  theiriselves  to  any  liability  by  such  refusal.8 

It  has  been  held  that  a  contract  for  the  organization  of  a  cor- 
poration, embracing  a  provision  for  the  conveyance  of  real  prop- 
erty, is  within  the  statute  of  frauds,  and  unenforceable  unless  in 
writing.9 

§  23.  Validity  of  agreements  for  employment. 

Of  importance  fully  equal  to  the  acquisition  of  the  necessary 
properties,  is  the  assurance  of  efficient  management  for  the  in- 
tended company.  Agreements  for  the  promotion  of  corporations 
therefore  frequently  embrace  definite  contracts  for  the  employ- 
ment of  managers  and  other  employees.  The  question  of  the 
validity  of  such  contracts  bears  a  close  analogy  to  that  of  the 
validity  of  contracts  for  the  purchase  of  property,  and  like  ob- 
jections have  been  made  thereto. 

7.  Altenberg    v.    Grant,    85    Fed.          An    oral    agreement   of   the   pro- 
Rep.  345,  29  C.  C.  A.  185,  54  U.  S.  moter  that  he  and  the  corporation 
App.     568.       See    also     Garrett    v.  will  furnish  the  vendor  with  mon- 
Kansas  City  Coal  Mining  Co.,  113  eys  to  perfect  his  title  to  the  lands 
Mo.  330,  20  S.  W.  965,  35  Am.  St.  to  be  sold  to  the  corporation,  may 
Rep.  713.  be  an  original  promise  on  the  part 

8.  See  Knox  v.  Childersburg  Land  of  the  promoter,  and  is  not  neces- 
Co.,  86  Ala.  180,  5  So.  578.  sarily  a  promise  to  answer  for  the 

9.  McLennan     v.      Boutell,      117  debt    of    the    corporation    and,    as 
Mich.  544,  76  N.  W.  75.     And  see  such,  within  the  statute  of  frauds. 
Rogers    v.    Penobscot    Mining    Co.,  The  promoter's  interest  in  the  suc- 
154  Fed.  Rep.  606,  612,  83  C.  C.  A.  cess  of  the  scheme  may  furnish  a 
380.      Cf.    Marie    v.    Garrison,    13  sufficient   consideration.     Maxey   v. 
Abb.  N.  C.  (N.  Y.)  210.  Rideout,  173  Fed.  Rep.  172. 


AGREEMENTS  FOR  PROMOTION.  35 

In  Magill  v.  Rendigs,10  the  defendants  argued  that  an  agree- 
ment of  a  promoter  that  the  corporation  to  be  organized  by  him 
should  employ  the  plaintiff,  was  contrary  to  public  policy  and 
void,  and  cases  were  cited  holding  that  the  personal  engagement 
of  a  director  that  another  should  be  employed  by  his  corporation 
is  unenforceable.  These  cases  the  court  distinguished  on  the 
ground  that  a  director  occupies  a  position  of  trust  to  which  his 
obligations  under  the  contract  might  be  antagonistic,  saying  that 
this  was  not  so  of  promoters.  Counsel  argued  that  the  defend- 
ants were  to  be  stockholders  or  directors.  The  court  answered 
that  this  was  not  necessarily  so, — that  while  promoters  frequently 
became  directors  and  stockholders  of  the  corporation  after  its 
organization,  they  in  a  great  many  instances  become  neither  one 
nor  the  other,  and  that  there  is  no  objection  in  law  to  one  who  is 
not  acting  in  a  trust  capacity  agreeing  with  another  to  secure  him 
employment  with  a  third  person. 

There  is  no  occasion  for  quarreling  with  the  actual  decision  of 
this  case,  but  the  reasoning  is  unsatisfactory.  It  has  been 
repeatedly  held  that  a  promoter,  while  he  has  in  theory  of  law 
no  power  to  act  for,  or  obligate,  the  company  he  promotes,  stands, 
nevertheless,  by  reason  of  his  effective  influence  and  control,  in  a 
fiduciary  relation  to  it.11  Agreements  of  the  character  under  dis- 
cussion in  Magill  v.  Rendigs  should  be  sustained  on  the  ground 
that  it  would  often  be  impossible  to  organize  a  corporation  if 
its  proper  management  were  not  first  assured,  and  that  while  such 
agreements  are  open  to  the  theoretical  objection  that  they  pledge 
in  advance  the  action  of  the  directors,  the  recognition  of  their 

10.  12  Ohio  Dec.  N.  P.  558.     See  corporation,  no  time  being  specified 

also    Bracher    v.    Hat-Sweat.    M'f  g  is,  in  New  York,  a  mere  hiring  at 

Co.,  49  Fed.  Rep.  921.    Cf.  Marston  will    which   either   party   may    ter- 

v.  Singapore  Rattan  Co.,  163  Mass,  minate    at    any    time.      Watson    v. 

296,  39  N.   E.  1113.  Gugino,  204  N.  Y.  535,  98  N.  E.  18, 

An  agreement  of  one  of  the  pro-  39  L.  R.  A.  N.  S  1090,  Am.  &  Eng. 

moters   to   devote   his    whole   time  Ann.  Cas.,  1913  D.  215. 
and  attention  to  the  business  of  the         11.  See  ante,  §  14. 


36  THE  LAW  OF  PROMOTERS. 

validity  is  a  matter  of  practical  necessity.  It  should  be  noted  that 
the  objection,  that  contracts  of  the  nature  discussed  in  this  and 
the  preceding  sections  are  contrary  to  public  policy  and  invalid 
because  they  assume  to  promise  in  advance  the  action  of  the 
directors,  could  with  equal  force  be  made  to  any  contract  which 
the  promoters  assume  to  make  for  the  intended  company.  Such 
contracts,  while  of  no  binding  effect  upon  the  corporation,  have 
been  repeatedly  held  to  be  enforceable  against  the  individual  pro- 
moters.12 The  difference  between  a  promise  of  corporate  action 
made  by  a  promoter  and  a  similar  agreement  made  by  a  director, 
is  that  the  preliminary  agreement  of  the  promoter  is  often  a  matter 
of  necessity,  while  in  the  case  of  an  existing  corporation  the  board 
of  directors  can  and  should  exercise  its  judgment  in  the  first 
instance,  and  there  is  no  necessity  or  excuse  for,  and  a  very 
practical  objection  to,  an  individual  director  personally  guaran- 
teeing in  advance  the  favorable  action  of  his  board. 

§  24.  Invalid  agreements  for  employment. 

Agreements  for  employment  intending  to  leave  the  employee  free 
from  the  control  of  the  directors  of  the  projected  corporation, 
and  not  subject  to  discharge  for  proper  cause,  are  void  and  unen- 
forceable.13 

In  Flaherty  v.  Gary,14  the  plaintiff  sued  upon  an  agreement 
with  the  defendants  under  which  the  latter  agreed  to  organize  a 
mortgage  insurance  company  which  should  employ  the  plaintiff  as 
sole  general  agent,  and  bound  themselves  not  to  allow  any  person 
to  become  a  stockholder,  trustee,  director  or  incorporator  of  the 
company,  who  did  not  agree  that  the  plaintiff  should  be  made 
such  sole  general  agent.  The  Appellate  Division  said  that  the 
contract  was  void  as  against  public  policy.  "  It  was  an  attempt 
on  the  part  of  the  plaintiff  to  use  the  corporation  laws  for  his 

12.  See  post,  §  77.  14.  62   N.    Y.   App.    Div.   116,   70 

13.  See    Hampton    v.    Buchanan,      Supp.  951,  affirmed  without  opinion, 
51  Wash.  155,  98  Pac.  374.  174  N.  Y.  550,  67  N.  E.  1082. 


AGREEMENTS  FOR  PROMOTION.  37 

special  benefit  and  advantage.  The  law  requires  that  subscrip- 
tions to  the  original  issue  of  capital  stock  shall  be  paid  for  in 
money  or  property,  and  the  directors  are  authorized  to  open  sub- 
scription books  and  receive  subscriptions  for  such  stock  (Stock 
Corp.  Law  [Laws  of  1890,  chap.  564],  Sec.  41,  as  amd.  by  Laws 
of  1892,  chap.  688),  but  plaintiff,  by  his  agreement,  seeks  to  en- 
graft additional  conditions.  The  agreement  contemplated,  pre- 
cluding any  person  from  becoming  a  stockholder  who  would  not 
agree  in  advance,  in  addition  to  paying  cash  for  his  stock,  that 
plaintiff  should  be  employed  during  the  entire  corporate  exist- 
ence subject  to  the  termination  of  the  contract  on  six  months' 
notice,  and  that  he  should  receive  for  his  services  nearly  one-third 
of  the  gross  receipts  of  the  company,  not  only  while  he  continued 
in  its  employ,  but  a  like  percentage  thereafter  of  the  premiums 
on  policies  then  in  force  and  on  policies  in  renewal  thereof.  He 
was  a  comparative  stranger  in  New  York,  having  come  here  from 
Canada  within  two  years.  The  directors  were  to  have  no  option 
but  to  employ  him  on  these  terms,  even  though  in  their  opinion  his 
services  might  be  of  no  value  to  the  corporation.  He  was  to  have 
exclusive  charge  of  soliciting  and  securing  business  for  the  com- 
pany. It  is  difficult  to  see  how  the  directors  could  perform  their 
statutory  duty  of  managing  and  controlling  the  affairs  of  the 
corporation  in  the  interests  of  the  stockholders,  its  policy  holders 
and  other  creditors,  if  they  were  to  be  thus  limited  and  restricted 
by  this  contract."  15 

The  actual  decision  of  this  case  was  no  doubt  correct.  The 
public  at  large  has,  however,  no  inherent  right  to  subscribe  for 
the  shares  of  any  company,  and  the  promoters  may  undoubtedly 
lawfully  agree  among  themselves  that  only  such  persons  shall  be 

15.  The    court     cites     Fisher    v.  Mo.    130,    13    S.    W.    393;    West    v. 

Bush,  35  Hun   <N.  Y.)   641;  Brown  Camden,  135  U.  S.  507;  10  S.  C.  838, 

v.  Britton,  41  N.  Y.   App.  Div.  57,  34  L.  Ed.  254;  Fennessy  v.  Ross,  5 

58   Supp.  353;   Dickson  v.   Kittson,  N.  Y.  App.  Div.  342,  39  Supp.  323; 

75    Minn.     168,     77    N.     W.     820;  Cook    on    Corporations     (4th    ed.), 

Jackson   v.    Ex'rs.   of   McLean,   100  §  622. 


gg  THE  LAW  OF  PROMOTERS. 

allowed  to  come  in  as  may  accord  with  their  views  as  to  the  con- 
duct of  the  business  of,  and  the  persons  to  be  employed  by,  the 
company.  Having  that  power,  there  is  no  reason  why  they  may 
not  agree  with  an  intended  employee  that  only  such  stockholders 
shall  be  admitted  as  will  consent  to  his  employment  upon  the 
agreed  terms.  The  promoters  take  the  risk  of  being  able  to 
secure  subscribers  upon  that  basis. 

§  25.  Validity  of  agreements  for  election  of  officers. 

Agreements  that  certain  persons  shall  hold  office  in  the  com- 
pany raise  a  somewhat  different  question,  and  their  validity  may 
well  depend  upon  the  period  of  time  over  which  the  tenure  of 
the  office  is  to  extend.  If  the  agreement  embraces  only  the  period 
for  which  officers  are  elected,  and  pledges  only  the  action  of  the 
organization  meeting  of  the  directors,  the  validity  of  the  agree- 
ment should,  it  seems,  be  controlled  by  the  same  considerations 
which  govern  the  questions  discussed  in  the  preceding  sections. 

The  validity  of  an  agreement  for  a  more  lengthy  retention  of 
office,  pledging  the  action  of  both  the  organization  and  subse- 
quent meetings  of  the  directors,  is  open  to  very  grave  doubt. 
Such  an  agreement  was  sustained  in  Kantzler  v.  Bensinger,16 
largely  because  all  of  the  stockholders  were  parties  thereto.  In 
the  absence  of  that  circumstance  an  agreement  attempting  to 
promise  permanent  tenure  of  office  would  probably  be  invalid  and 
unenforceable  even  between  the  parties.17 

16.  214  111.  589,  73  N.  E.  874,  re-  an  agreement  between  the  promot- 

versing,  Bensinger  v.  Kantzler,  112  ers,  to  subordinate  the  payment  of 

111.  App.  293.    To  the  same  effect  is  their    salaries    to    the   payment    of 

Drucklieb  v.  Sam  H.  Harris,  209  N.  certain      specified      dividends,      see 

Y.  211,  102  N.  E.  599.  Mills   v.   Hendershot,   70   N.   J.    Eq. 

Such  agreements  are  binding  only  258,  62  Atl.  542. 

on  the  parties,  and  not  on  the  cor-  17.  West   v.   Camden,   135   U.    S. 

poration.    Drucklieb  v.  Sam  H.  Har-  507,  10  Sup.  Ct.  838,  34  L.  Ed.  254. 

ris,  209  N.  Y.  211,  102  N.  E.  599.  Cases    involving    the    validity    of 

As  to  whether  the  corporation,  or  agreements  to  elect  certain  officers, 

its  receiver,  can  claim  the  benefit  of  entered  into  by  directors  or  stock- 


AGREEMENTS  FOR  PROMOTION. 


39 


§  26.  Agreements  for  division  of  shares. 

An  agreement  of  the  promoters  fixing  their  respective  interests 
in  the  capital  stock  of  the  intended  company  is  valid  between  the 
parties,18  and  may  sometimes  become  binding  upon  the  corpo- 
ration.19 


holders  of  existing  corporations, 
rest  upon  a  somewhat  'different 
basis.  See  ante,  §  23.  For  such 
cases  see  Thompson  on  Corpora- 
tions, 2nd  Ed.,  §§  902,  4113,  and 
Cook  on  Corporations,  7th  Ed.,  § 
622-A. 

18.  McCracken     v.     Robison,     57 
Fed.  Rep.  375,  6  C.  C.  A.  400,  14  U. 
S.     App.     602;     Joslin     v.     Stokes, 
38     N.      J.      Eq.      31,     5     Am.      & 
Eng.  Corp.  Gas.  98;  King  v.  Barnes, 
109  N.  Y.  267,  16  N.  E.  332;  Dick- 
erson  v.   Appleton,  123  N.   Y.   App. 
Div.    903,    108    Supp.    293,    affirmed 
without  opinion,  195  N.  Y.  507,  88 
N.    E.    1117;    Eno    v.    Sanders,    39 
Wash.  238,  81  Pac.  696. 

In  San  Antonio  Irr.  Co.  v. 
Deutschmann,  102  Tex.  201,  105  S. 
W.  486,  114  S.  W.  1174,  a  stipula- 
tion that  one  of  the  parties  might 
pay  for  the  stock  at  such  time  as  he 
"  could  arrange  "  was  held  to  be  in 
violation  of  the  statute  and  unen- 
forceable. 

19.  Federal. — Crosby  Lumber  Co. 
v.  Smith,  51  Fed.  Rep.  63,  2  C.  C. 
A.  97,  3  U.  S.  App.  125.     Cf.  Dick- 
inson v.  Matheson  Motor  Car  Co., 
161  Fed.   Rep.   874,   aff'd,   171  Fed. 
Rep.  646,  97  C.  C.  A.  29;  Summer- 
lin  v.  Fronteriza  Silver  Min.  &  Mill 
Co.,  41  Fed.  Rep.  249. 

California. — Chater  v.  San  Fran- 
cisco Sugar  Refining  Co.,  19  Cal. 
220. 


Minnesota. — Selover  v.  Isle  Har- 
bor Land  Co.,  91  Minn.  451,  98  N. 
W.  344,  100  Minn.  253,  111  N.  W. 
155. 

Mississippi. — Mulvihill  v.  Vicks- 
burg  Ry.,  etc.,  Co.,  88  Miss.  689,  40 
So.  647. 

South  Dakota. — Chambers  v.  Mitt- 
nacht,  23  S.  D.  449,  122  N.  W.  434. 

Promoters  who  obtain  control  of 
the  corporation  and  take  from  it  a 
consideration  for  the  transfer  of 
their  properties  greater  than,  or  dif- 
ferent from,  that  to  which  they  are 
under  the  preliminary  agreement 
entitled,  may  be  compelled  to 
make  restitution.  See  Huiskamp 
v.  West,  47  Fed.  Rep.  236;  (re- 
versed, sub  nom.  West  v.  Huiskamp, 
63  Fed.  Rep.  749,  11  C.  C.  A.  401, 
24  U.  S.  App.  133).  See  also  dic- 
tum in  Wilson  v.  Trenton  Passen- 
ger Ry.  Co.,  56  N.  J.  Eq.  783,  40 
Atl.  597,  reversing,  Trenton  Pas- 
senger Ry.  Co.  v.  Wilson,  55  N.  J. 
Eq.  273,  37  Atl.  476.  Cf.  Brehm  v. 
Sperry,  et  al.  92  Md.  378,  48  Atl. 
368;  Tompkins  v.  Sperry  Jones  & 
Co.,  96  Md.  560,  54  Atl.  254;  Flan- 
agan v.  Lyon,  54  N.  Y.  Misc.  372, 
105  Supp.  1049. 

Where  the  contract  to  transfer 
certain  shares  is  not  made  on  be- 
half of  the  corporation,  but  as  a 
personal  agreement  of  the  promot- 
ers, the  corporation  does  not  be- 
come liable  thereon.  Morgan  v. 


£0  THE  LAW  OF  PROMOTERS. 

An  agreement  of  the  promoters  that  they  will  not  sell  the  shares 
allotted  to  them  until  after  all  the  treasury  stock,  or  a  specified 
portion  thereof,  has  been  sold,  is  proper  and  may  be  enforced  by  in- 
junction.20 

It  was  said  in  Hladovec  v.  Paul  21  that  an  agreement  limiting 
the  number  of  shares  which  may  be  held  by  any  one  stockholder 
is,  while  not  binding  upon  the  corporation,  valid  as  between  the 
parties  to  the  agreement. 

§  27.  Agreements  for  control  of  corporation. 

An  agreement  between  the  parties  engaged  in  the  promotion  of 
a  corporation  to  vote  their  shares  as  a  unit  is  valid  in  those  juris- 
dictions which  recognize  the  validity  of  similar  agreements  be- 
tween stockholders  of  existing  corporations,22  but  an  agreement, 
or  by-law,  which  seeks  to  place  the  voting  power  in  the  hands 
of  the  promoters  and  keep  the  control  of  the  corporation  out  of 
the  hands  of  its  stockholders,  is  unlawful  and  will  be  set  aside  by 
the  courts.23 

It  has  been  held  that  an  agreement  between  the  promoters  that 
the  corporation  to  be  organized  by  them  shall  be  used  simply  as 
an  instrumentality  for  the  conduct  of  a  partnership  business  un- 
der corporate  guise,  is  contrary  to  the  policy  of  the  law,  and  the 
corporation  will,  in  spite  of  the  agreement,  be  held  subject  to  the 
management  and  control  of  a  board  of  directors  duly  elected  by 
the  stockholders  as  provided  by  law.24 

Bon  Bon  Co.,  165  N.  Y.  App.  Div.  89,  Montgomery,  148  N.   Y.  519,  43  N. 

150  Supp.  668.  E.  57. 

An  agreement  as  to  the  division  21.  222  111.  254,  263,  78  N.  E.  619, 

of  future  issues  of  stock,  to  which  affirming,    124    111.   App.   589.     Fol- 

the  corporation  is  not  a  party,  can-  lowed    in    Cross    v.    Farmers'    Ele- 

not  be  enforced  in  a  representative  vator  Co.  of  Dawson,  —  N.  D.  — , 

action  brought  on  its  behalf.    Wat-  153  N.  W.  279. 

ers  v.  Waters  &  Co.,  130  N.  Y.  App.  22.  Gray  v.  Bloomington  &  Nor- 

Div.   678,   115   Supp.   432,   affirmed,  mal  Ry.,  120  111.   App.  159. 

201  N.  Y.  184,  94  N.  E.  602.  23.  Terwilliger  v.  Great  Western 

20.  Brown  v.  Bracking,  11  Idaho  Telegraph  Co.,  59  111.  249. 

678,     83     Pac.     950;     Williams     v.  24.  Jackson  v.  Hooper,  76  N.  J. 


AGREEMENTS  FOR  PROMOTION.  41 

It  seems  to  be  held  in  Martin  v.  Remington-Martin  Co.25  that 
an  agreement  that  one  of  the  parties  shall  have,  and  continue  to 
have,  a  one-sixth  interest  in  the  common  stock  of  the  company  is 
invalid  in  so  far  as  it  deprives  the  corporation  of  the  benefit  of  the 
statutory  provisions  for  an  increase  of  its  capital  stock. 

§  28.  Property  rights  pending  promotion. 

A  contract  under  which  one  of  the  parties  purchases  from  the 
others  an  undivided  interest  in  property,  which  is  to  be  conveyed 
to  a  company  to  be  formed  and  the  stock  of  the  company  divided 
among  the  parties  in  proportion  to  their  respective  interests  in  the 
property,  does  not,  it  is  held,  pass  any  title,  legal  or  equitable,  to 
an  undivided  interest  in  the  property,  and  confers  upon  the  pur- 
chaser a  mere  right  to  receive  his  proportionate  part  of  the  shares 
of  the  company  when  formed.26 

§  29.  Promoters'  certificates. 

It  is  held  in  Reading  Finance  &  Securities  Co.  v.  Harley  27  that 
a  certificate  of  the  promoters,  issued  to  a  subscriber  pending  the 
organization  of  the  company,  certifying  the  number  of  shares 

Eq.  592,  75  Atl.  568,  27  L.  R.  A.  N.  1127),    where    the    validity    of    an 

S.  658,  reversing,  76  N.  J.  Eq.  185,  agreement    not   to   increase  or   de- 

74  Atl.  130.     Cf.  Tascher  v.  Timer-  crease  the  number  of  directors  was 

man,    67    111.    App.    568;    Card    v.  involved. 

Moore,  68  N.  Y.  App.  Div.  327,  74  26.  Foiirchy    v.    Ellis,    140    Fed. 

Supp.   18,   affirmed,   173  N.   Y.  598,  Rep.  149;  London  Assurance  Co.  v. 

66  N.  E.  1105.  Drennen,  116  U.  S.  461,  29  L.   Ed. 

25.  95    N.    Y.    App.    Div.    18,    88  688,  6  Sup.  Ct.  442 ;  Jones  v.  Gould, 

Supp.  573.  141  Fed.  Rep.  698,  affirmed,  149  Fed. 

Cf.   Burden   v.    Burden,    8  N.    Y.  Rep.  153,  80  C.  C.  A.  1 ;  Butterfleld 

App.   Div.  160,  41   Supp.  948,  affd,  v.    Harris,    20    Cal.    App.    471,    129 

159  N.  Y.  287,  54  N.  E.  17  Pac.  614 ;  Ex-Mission  Land  &  Water 

Compare   also    Bond    v.    Atlantic  Co.   v.   Flash,  97  Cal.  610,  32  Pac. 

Terra    Cotta   Co.,    137   N.    Y.    App.  600;  Marseilles  Land  Co.  v.  Aldrich, 

Div.  671,  122  Supp.  425,   (followed,  86  111.  504;   Franey  v.  Warner,  96 

151  App.  Div.  938,  135  Supp.  1101,  Wis.  222,  71  N.  W.  81. 

affirmed,  210  N.  Y.  587,  104  N.  E.  27.  186  Fed.  Rep.  673,  108  C.  C. 

A.  529. 


42  THE  LAW  OF  PROMOTERS. 

subscribed  for  and  the  payments  made  thereon,  is  not  a  mere  re- 
ceipt, but  a  thing  of  value  which  may  properly  be  the  subject  of 
an  action  for  conversion. 

§  30.  Interpretation  of  agreements  for  sale  of  property  to  cor- 
poration. 

Questions  as  to  the  proper  interpretation  of  contracts  for  the 
promotion  of  corporations  necessarily  arise  from  time  to  time. 
These  contracts  are,  like  all  others,  to  be  construed  in  accordance 
with  the  presumable  intention  of  the  parties,  to  be  gathered  from 
the  terms  of  the  contract  read  in  the  light  of  the  Surrounding 
circumstances.  Certain  cases,  however,  seem  to  have  particular 
application  to  contracts  for  the  promotion  of  corporations,  and  a 
review  of  some  of  these  seems  pertinent.28 

In  Philes  v.  Hickies,29  the  plaintiffs  conveyed  all  their  interest 
in  certain  mining  claims  to  the  defendant  Hickies,  in  trust  to 
organize  a  corporation  to  take  over  and  work  the  mines.  The 
agreement  provided  that  120,000  shares  should  be  set  aside  as 
working  capital  to  defray  expenses,  and  that  an  amount  of  stock 
not  to  exceed  three-fifths  of  the  balance,  should  be  issued  and  de- 
livered to  the  plaintiffs  in  payment  for  their  properties.  Hickies 
organized  a  corporation  with  a  capital  consisting  of  600,000 
shares,  transferred  the  properties  to  it,  and  received  584,600 
shares.  He  succeeded  in  selling  some  25,000  shares,  but  issued 
none  to  the  plaintiffs.  The  court  held  that  the  agreement  did  not 
intend  that  Hickies  was  to  keep  all  of  the  stock  of  the  company 
until  the  stock  retained  for  working  capital  had  actually  been 
sold,  and  that  the  plaintiffs  were  entitled  to  their  stock  as  soon 
as  the  company  was  organized  and  the  shares  reserved  for  work- 
ing capital  set  apart. 

In  Childs  v.   Smith 30  the  plaintiff   agreed  to  convey   certain 

28.  See  also  post,  §§  33,  34,  42.          154    U.    S.    505,    14    Sup.    Ct.    1147. 

29.  2    Ariz.     407,     18    Pac.    595,          30.  46    N.    Y.    34,    reversing,    55 
affirmed    for    want    of    prosecution,      Barb.  45,  38  How.  Pr.  328. 


AGREEMENTS  FOR  PROMOTION.  43 

real  estate  to  the  defendant,  and  the  defendant  agreed  to  assume 
the  mortgages  thereon  and  to  pay  $1,000  at  once,  and  $2,000 
more  when  the  corporation  which  was  to  operate  the  property 
should  be  organized.  The  deed  was  delivered  and  the  defendant 
took  possession.  A  certificate  of  incorporation  was  executed,  by- 
laws were  adopted,  and  officers  elected,  but  the  certificate  of  in- 
corporation was  not  filed.  The  court  said  that  the  organization 
of  the  corporation  was  not  to  fix  the  fact  of  the  indebtedness,  but 
only  to  mark  the  time  when  a  solution  of  that  indebtedness  might 
be  exacted ;  that  it  would  be  too  technical  to  hold  that  the  parties 
meant  that  the  time  of  payment  should  not  arrive  until  there 
should  be  an  organization  so  exactly  in  accordance  with  the 
statute  as  that  it  would  successfully  meet  any  scrutiny  which  the 
sovereign  power  could  institute;  that  it  was  rather  to  be  held 
that  the  parties  meant  such  acts  and  doings  among  the  associates, 
as  would  set  on  foot,  in  practical  existence,  a  body  in  which  they 
should  have  rights,  and  to  which  they  would  owe  obligations, 
and  through  which  they  should  possess  rights  against,  and  incur 
obligations  to,  each  other;  that  such  acts  had  been  performed 
and  that  the  $2,000  had  become  payable. 

The  trial  court  in  Mcllquham  v.  Taylor  31  held  that  an  agree- 
ment to  pay  to  the  plaintiff  for  his  property,  £1,000  in  cash 
or  "  £1,000  worth  of  fully  paid  up  shares  in  a  company  to  be 
formed  "  with  a  capital  not  to  exceed  £12,000,  entitled  the  plain- 
tiff to  stand,  as  to  the  shares  to  be  transferred  to  him,  upon  an 
equal  footing  with  the  other  shareholders,  and  that  the  engage- 
ment of  the  defendants  was  not  performed  by  the  organization  of 
a  corporation  with  preferred  and  common  stock  and  the  tender 
to  the  plaintiff  of  shares  of  the  latter  kind.  The  Court  of  Appeal 
affirmed  the  judgment  of  the  trial  court  on  the  ground  that 
"  £1,000  worth  of  shares  "  meant  shares  of  an  actual,  not  a  nom- 
inal, value  of  £1,000. 

31.  1895,  1  Ch.  Div.  53. 


44  THE  LAW  OF  PROMOTERS. 

It  was  held  in  Peek  v.  Steinberg  32  that  an  agreement  that  the 
plaintiff  should  receive  for  his  property  "  paid  up  stock  *   • 
to  the  amount  of  $12,000  "  did  not  entitle  him  to  receive  stock 
actually  worth  $12,000,  but  merely  stock  of  the  par  value  of 
$12,000. 

In  Hardee  v.  Sunset  Oil  Co.,33  one  Richardson  owned  certain  oil 
claims  in  California  which  he  agreed  to  convey  to  one  Handy,  or 
to  a  corporation  to  be  formed  by  him,  in  consideration  of  the  sum 
of  $5,000  to  be  paid  in  cash.  The  agreement  provided  that  if  a 
corporation  should  be  formed  one  half  of  the  capital  stock  was 
to  be  allotted  to  Richardson.  Handy  further  agreed  that  he 
would  deposit  the  sum  of  $25,000  with  the  company's  treasurer, 
to  be  expended  in  the  development  of  the  oil  claims.  The  com- 
plainants, the  heirs  of  Richardson,  subsequently  claimed  that  the 
$25,000  paid  into  the  treasury  by  Handy  should  have  been 
credited  to  Richardson  on  the. books  of  the  corporation.  The 
court  held  that  this  was  not  the  proper  construction  of  the  agree- 
ment,— that  the  intention  was  that  Richardson  as  the  owner  of 
one  half  of  the  stock,  should  reap  the  benefit  of  the  expenditure  of 
this  $25,000  in  the  development  of  the  property,  and  that  there 
was  no  basis  for  the  complainants'  contention. 

In  McNeil  v.  Fultz  34  a  promoter  obtained  the  transfer  of  the 
plaintiff's  property,  under  an  agreement  that  the  same  should  be 
sold,  with  other  properties,  to  a  corporation  to  be  formed,  the 
promoter  agreeing  to  give  the  plaintiff  for  his  property  whatever 
bonds  and  shares  he,  the  promoter,  might  receive  therefor  from 
the  corporation.  The  promoter  was  forced,  in  order  to  save  some 
of  the  other  properties,  to  borrow  money  and  to  pay  a  bonus  there- 
for. He  attempted  to  charge  the  plaintiff  with  a  proportionate 
share  of  this  bonus,  but  the  court  held  the  bonus  to  be  an  item  of 
the  expense  of  the  flotation,  the  burden  of  which  the  promoter 
had  no  right  to  cast  upon  the  plaintiff. 

32.  163  Cal.  127,  124  Pac.  834.  34.  38  Can.  Sup.  Ct.  198. 

33.  56  Fed.  Rep.  51. 


AGREEMENTS  FOR  PROMOTION.  45 

§31.  Performance  of  agreements  for  sale  of  property  to  cor- 
poration. 

In  Field  v.  Pierce,35  the  plaintiffs,  having  secured  certain  con- 
tracts or  options  for  the  purchase  of  mining  properties  in  Nova 
Scotia,  agreed  to  transfer  them  to  the  defendant  upon  consider- 
ation that  the  defendant  should  furnish  the  money  to  pay  for  the 
properties,  organize  a  corporation  to  take  them  over,  and  trans- 
fer to  the  plaintiffs  one-tenth  of  the  shares  issued  by  the  com- 
pany. Plaintiffs  duly  performed  on  their  part.  The  defendant 
organized  a  corporation  with  a  capital  stock  of  $500,000.  The 
defendant  and  his  associates  met  and  each  gave  his  check  to  the 
treasurer  of  the  company  for  the  par  value  of  the  shares  allotted 
to  him.  The  defendant  gave  his  check  for  the  shares  to  be  trans- 
ferred to  the  plaintiffs.  The  treasurer  delivered  all  the  checks 
to  the  defendant  and  the  corporation  took  a  conveyance  of  the 
property.  The  defendant  then  returned  the  checks  to  the  drawers, 
each  of  them  paying  him  the  price  of  the  shares  actually  agreed 
upon  between  the  parties.  An  assessment  was  afterwards  levied 
upon  all  the  shares,  including  the  plaintiffs'.  The  plaintiffs 
called  upon  the  defendant  for  their  certificates,  which  the  de- 
fendant declined  to  deliver  until  the  assessment  had  been  paid. 
The  company  sold  the  plaintiffs'  shares  to  pay  the  assessment. 
The  plaintiffs  sued  the  defendant  for  the  market  value  of  the 
shares.  The  court  held  that  the  plaintiffs'  shares  were  full  paid 
as  to  them,  that  the  certificates  were  not  the  shares,  and  that 
the  rights  of  the  plaintiffs  were  not  affected  by  the  refusal  of  the 
corporation  to  deliver  the  certificates ;  that  the  plaintiffs  had  a 
right  to  the  shares,  and  that  if  the  corporation  had  wrongfully 
refused  to  deliver  the  certificates,  there  was  nothing  to  show  that 
the  defendant  was  responsible;  that  the  defendant,  as  a  stock- 
holder, might  have  voted  for  the  assessment  and  the  sale  of  the 
plaintiffs'  shares,  but  such  acts  were  the  acts  of  the  corporation 

35.  102  Mass.  253. 


46  THE  LAW  OF  PROMOTERS. 

and  not  of  the  defendant,  and  that  the  remedy  of  the  plaintiffs 
was  against  the  company. 

§  32.  Donating  shares  to  the  treasury. 

The  fact  that  the  promoters  return  to  the  treasury  of  the  cor- 
poration, a  portion  of  the  shares  previously  issued  to  them,  does 
not  necessarily  give  rise  to  an  implied  agreement  of  the  corpora- 
tion to  pay  therefor. 

In  Eldred  v.  Bell  Telephone  Co.,36  the  plaintiff  acquired  from 
the  National  Bell  Telephone  Company  the  right  to  ^operate  tele- 
phone exchanges  in  Kansas  City  and  St.  Louis,  his  agreement  re- 
quiring the  organization  of  the  defendant  corporation  under  the 
laws  of  Missouri  and,  among  other  matters,  the  acquisition  by  it 
of  certain  outstanding  contracts  between  the  National  Bell  Tele- 
phone Company  and  the  American  District  Telegraph  Company 
of  St.  Louis.  The  defendant  corporation  was  thereupon  organ- 
ized with  a  nominal  capital  of  $400,000,  all  of  which  was  issued 
as  full  paid  to  the  plaintiff  and  his  associates  in  consideration 
of  the  transfer  to  it  of  the  rights  acquired,  or  to  be  acquired, 
from  the  National  Bell  Telephone  Company.  A  preliminary  un- 
derstanding was  arrived  at,  under  which  the  four  associates  of 
the  plaintiff  were  to  receive  1770  shares  and  the  plaintiff  was  to 
retain  the  remaining  2230  shares  for  himself.  It  was  subsequently 
found  that  shares  were  needed  in  order  to  take  in  the  American 
District  Telegraph  Company,  and  the  plaintiff  thereupon,  for 
this  purpose,  surrendered  250  shares  of  the  stock  allotted  to  him. 
The  plaintiff  subsequently  brought  suit  upon  a  supposed  implied 
agreement  of  the  defendant  to  pay  him  the  reasonable  value  of  the 
250  shares  so  surrendered.  The  court,  upon  a  consideration  of 
the  evidence,  decided  that  there  was  nothing  to  warrant  the 
conclusion  that  there  was  any  sale  of  this  stock  by  the  plaintiff 
to  the  defendant,  or  any  loan  or  advance  of  it  for  its  uses,  for 

36.  119  U.  S.  513,  7  Sup.  Ct.  296,  30  Law  Ed.  496. 


AGREEMENTS  FOR  PROMOTION.  47 

which  it  was  expected  that  any  return  or  payment  should  be  made. 
It  has  been  held  that  an  agreement  between  the  parties  en- 
gaged in  the  formation  of  a  corporation,  that  a  portion  of  the 
stock  to  be  issued  to  them  shall  be  used  for  the  benefit  of  the 
corporation,  cannot  be  enforced  by  the  corporation,  but  only  by 
the  parties  to  the  agreement.37 

§  33.  Interpretation  of  agreements  relating  to  promoter's  com- 
pensation. 

Corporations  are  often  promoted  in  pursuance  of  an  agreement 
by  which  a  person  owning  property  which  he  desires  to  sell  to  the 
contemplated  company,  undertakes  to  pay  the  promoter  a  stipu- 
lated compensation  for  his  services.  Such  agreements  are,  if 
properly  disclosed  to  the  corporation,  unobjectionable,  but  ques- 
tions arise  as  to  their  interpretation.38 

In  Locke  v.  Wilson 39  the  defendant  Wilson  employed  the 
plaintiff  to  form  a  corporation  to  take  over  certain  brewery  prop- 
erties under  an  agreement  to  pay  the  plaintiff  for  his  services, 
$2,000  in  the  shares  of  the  company,  provided  that  the  plaintiff 
secured  $28,000  in  bona  fide  subscriptions,  of  which  said  defend- 
ant agreed  to  take  $12,000.  The  plaintiff  maintained  that  the 
correspondence  and  evidence  did  not  constitute  the  entire  con- 
tract and  that  the  defendant  Wilson  had  orally  agreed  to  take  all 
the  stock  that  the  plaintiff  could  not  place  elsewhere.  The  court 
held  that  the  written  contract  conclusively  negatived  this  con- 
tention, and  that  the  trial  court  had  erred  in  submitting  the  ques- 
tion to  the  jury. 

In  Hix  v.  Edison  Electric  Light  Co.,40  the  defendant  had  em- 

37.  Flanagan   v.   Lyon,  54  N.   Y.          39.  135  Mich.  593,  98  N.  W.  400, 
Misc.  372,  105  Supp.  1049.    See  also      10  Det.  Leg.  News  900. 

Brennan  v.   Vogler,  174  Mass.  272,  40.  10  N.  Y.  App.  Div.  75,  75  N. 

54  N.  E.  556.  Y.   St.  R.  1067,  41  Supp.  680.     See 

38.  See  in  addition  to  the  cases  same  case  on  later  appeal,  27  N.  Y. 
discussed  in  this  section,  Proskey  v.  App.     Div.     248,     50     Supp.     592, 
Manning,  110  N.  Y.  Supp.  221.    See  affirmed,   163   N.   Y.  573,   57   N.  E. 
also  §§  30,  34  and  42.  1112. 


48  THE  LAW  OF  PROMOTERS. 

ployed  the  plaintiff  to  promote  and  organize  a  corporation  for 
electric  lighting  in  Philadelphia,  under  a  memorandum  reciting 
that  of  the  $1,000,000  of  capital  stock  of  the  Philadelphia  com- 
pany, the  defendant  company  was  to  receive  30  per  cent  in  stock 
and  5  per  cent  in  cash,  that  the  "  promoters  "  were  to  receive  10 
per  cent  in  stock,  as  a  rebate  from  the  defendant  company's  35 
per  cent,  and  that  the  plaintiff  was  to  receive  5  per  cent,  as  a 
rebate  from  the  defendant  company's  remaining  25  per  cent. 
The  contract  further  provided  that  in  case  of  any  future  in- 
creases in  the  capital  of  the  Philadelphia  corporation,«35  per  cent 
of  the  increase  was  to  go  to  the  defendant,  and  a  rebate  of  5  per 
cent  therefrom  to  the  "  present  promoter."  The  court  admitted 
evidence  of  surrounding  circumstances  to  aid  in  determining 
whether  the  plaintiff  was  the  "  present  promoter  "  intended  by  the 
agreement.  After  the  Philadelphia  company  was  organized,  the 
successor  of  the  defendant  company  made  a  new  agreement 
whereby  it  reduced  its  percentage  of  future  increases  from  35  per 
cent  to  10  per  cent,  in  consideration  of  which  the  Philadelphia 
company  relinquished  certain  rights.  The  plaintiff  was  a  stock- 
holder in  the  Philadelphia  company  and  voted  in  favor  of  this 
new  contract.  The  court  held  that  neither  the  fact  that  the 
defendant's  percentage  had  been  reduced,  nor  the  fact  that  the 
plaintiff  as  a  stockholder  of  the  Philadelphia  company  voted  in 
favor  of  the  agreement  reducing  such  percentage,  affected  his 
right  to  receive  his  5  per  cent  of  the  increase  from  the  defendant. 
The  court  did,  however,  hold  that  the  plaintiff  was  not  entitled  to 
5  per  cent  upon  the  first  issue  of  increased  stock,  as  that  increase 
represented  the  value  of  earnings  put  into  betterments,  and  was 
not  an  increase  within  the  meaning  of  the  contract. 

In  Varnum  v.  Thruston,41  the  plaintiff  had  induced  one  Cowles, 
the  holder  of  certain  contracts  for  the  purchase  of  coal  lands,  to 
enter  into  an  agreement  with  the  defendants  which  provided  for 

41.  17  Md.  470. 


AGREEMENTS  FOR  PROMOTION.  49 

the  conveyance  of  the  lands  to  the  defendants,  who  were  to  pro- 
vide the  funds  necessary  to  complete  the  contract,  and  to  organize 
a  corporation  to  take  title  to  the  lands  and  mine  the  coal.  The 
defendants  were  to  sell  sufficient  shares  to  reimburse  themselves 
for  the  cost  of  the  land  and  the  expenses  in  relation  thereto,  to 
pay  to  Cowles  the  sum  of  $15,000,  and  to  raise  the  sum  of  $200,- 
000  working  capital.  The  agreement  then  provided  that  the  de- 
fendants "  after  making  the  sales  and  payments  aforesaid,  shall 
next  transfer  one-twentieth  part  of  the  whole  of  the  said  capital 
stock  to  Charles  M.  Thruston  (the  plaintiff),  and  the  balance  of 
the  said  stock  then  remaining  shall  belong  "  one-half  to  Cowles 
and  the  other  half  to  the  defendants.  The  enterprise  was  not 
successful.  The  plaintiff  brought  suit,  claiming  that  he  was  in 
any  event  entitled  to  a  one-twentieth  part  of  the  entire  capital 
stock.  The  court  held  that  the  plaintiff  was  not  entitled  to  re- 
ceive any  part  of  the  stock  until  sufficient  shares  had  been  sold  to 
reimburse  the  defendants  for  the  cost  of  the  land,  the  incidental 
expenses,  and  the  amount  agreed  to  be  paid  to  Cowles. 

§  34.  Interpretation  of  agreements  for  division  of  profits  of  pro- 
motion, or  shares  of  corporation. 

Agreements  for  the  division  of  the  shares  of  the  corporation, 
or  of  the  profits  of  its  promotion,  frequently  give  rise  to  questions 
of  interpretation.42  The  courts,  in  case  of  doubt,  always  attempt 
to  interpret  the  agreement  in  such  manner  that  it  shall,  in  view 
of  all  the  circumstances,  effect  justice  between  the  parties. 

In  Bates  v.  Wilson  43  an  agreement  between  three  parties  that 

42.  See  also  cases  cited,  ante,  §§  of    the    company    based    upon    an 
30  and  33,  and  post,  §  42.  equal   division  of  the  total  capital 

43.  14  Colo.  140,  159-160,  24  Pac.  stock  among  all  the  incorporators. 
99,  105.  Brown    v.    Florida    Southern    Rail- 

The  mere  fact  of  being  an  incor-  way,  19  Fla.  472. 

porator  does  not,  independent  of  a  A  promoter   who  has   refused   to 

contract,    entitle   one   to   a    proper-  take    his    share    of    the    unissued 

tionate  share  of  the  capital  stock  stock,  will  not  be  heard  to  complain 


50  THE  LAW  OF  PROMOTERS. 

the  capital  stock  of  the  corporation  to  be  formed  should  be  "  di- 
vided half  and  half  between  the  parties  "  was  held,  standing  alone 
and  unexplained,  to  be  without  significance  unless  construed  to 
mean  "  equally  between  the  parties." 

In  Donner  v.  Donner,44  the  plaintiff  bought  from  the  defendant 
"  $25,000  worth  of  the  defendant's  interest  "  in  three  companies. 
These  companies  were  shortly  afterwards  sold  to  the  United 
States  Steel  Corporation,  at  a  large  profit.  A  dispute  having 
arisen  as  to  the  plaintiff's  interest  in  the  profits,  the  court  found 
that  the  evidence  established  that  the  plaintiff  acquired  one-tenth 
of  the  defendant's  interest  of  $250,000  in  the  stock  of  these  com- 
panies, and  should  consequently  have  been  allowed  one-tenth  of 
the  profits  of  the  transaction. 

In  Logan  v.  Simpson,45  the  plaintiff  had  obtained  control  of 
7202  shares  of  the  stock  of  the  Williamsburg  Gaslight  Company, 
and  agreed  to  transfer  the  same,  at  a  price  of  $87.50  a  share,  to 
a  syndicate  formed  to  affect  the  consolidation  of  various  gas  com- 
panies in  Brooklyn.  A  syndicate  agreement  was  prepared  under 
which  the  subscribers  agreed  to  raise 'a  fund  of  $15,000,000  to 
be  used  for  the  purpose  of  bringing  about  such  consolidation. 
This  agreement  was  subscribed  by  the  plaintiff  for  $650,000. 
The  syndicate  committee  proceeded  with  the  consolidation,  or- 
ganized a  new  company  under  the  name  of  Brooklyn  Union  Gas 
Company,  and  received  from  such  company  for  the  transfer  to  it 
of  the  shares  of  the  various  constituent  companies,  bonds  of  the 
Brooklyn  Union  Gas  Company,  amounting  to  $5,816,069.09  and 
stock  of  that  company  of  the  par  value  of  $8,710,761.47.  The 
sum  which  the  committee  had  paid  for  the  stock  of  the  constituent 

that  all  of  such  stock  was  then  44.  211  Pa.  409,  60  Atl.  1036.  See 
taken  by  his  co-promoter.  Conklin  also  Donner  v.  Donner,  217  Pa.  37, 
v.  United  Construction  &  Supply  66  Atl.  147. 

Co.,  166  N.  Y.  App.  Div.  284,  151  45.  60  N.  Y.  App.  Div. -617,  70 
Supp.  624.  Supp.  86.  Appeal  dismissed,  169  N. 

Y.  599,  62  N.  E.  1097. 


AGREEMENTS  FOR  PROMOTION.  51 

companies  plus  the  allowance  made  to  the  committee  for  services, 
aggregated  $8,725,804.01.  The  committee  distributed  profits 
among  the  members  of  the  syndicate  based  upon  an  aggregate 
subscription  of  $15,000,000,  of  which  the  plaintiff's  interest  was 
4%  per  cent,  based  upon  his  subscription  of  $650,000.  The 
plaintiff  claimed  that  he  was  entitled  to  receive  that  proportion 
of  the  stocks  and  bonds  distributed,  which  his  interest  of  $650,000 
bore  to  the  $8,725,804.01  actually  contributed  by  the  syndicate. 
The  court  pointed  out  that  while  the  plaintiff  had  delivered  to  the 
pool  7202  shares  of  stock,  for  which  he  was  allowed  $87.50  a 
share  and  an  additional  sum  representing  the  excess  over  $87.50, 
which  the  plaintiff  had  been  compelled  to  pay  for  some  of  his 
shares,  the  syndicate  had  been  called  upon  to  pay  out  over  $400,- 
000  representing  money  which  the  plaintiff  owed  upon  his  stock. 
The  case  was  complicated  by  a  question  of  fact  which  was,  how- 
ever, determined  adversely  to  the  plaintiff.  The  court  held  that 
the  syndicate  committee  had  given  to  the  plaintiff  all  that  he 
was,  under  the  agreement,  entitled  to  receive. 

In  Hunter  Smokeless  Powder  Co.  v.  Hunter,46  the  defendant 
Hunter,  being  the  owner  of  a  valuable  secret  formula,  entered  into 
an  agreement  with  certain  individuals  that  they  should  contribute 
$250  each  to  perfect  a  machine  for  utilizing  the  formula,  the 
agreement  providing  that  the  interest  of  the  defendant  Hunter 
should  be  three-fifths,  and  the  interest  of  the  other  parties  should 
be  two-fifths,  "  for  the  purpose  of  organizing  a  stock  company 
or  for  the  purpose  of  a  co-partnership ;  and  the  capital  stock  shall 
be  distributed  accordingly,  or  as  the  co-partnership  shall  be  pro- 
vided for  the  same."  The  parties  organized  the  plaintiff  corpora- 
tion, with  a  capital  stock  of  $100,000.  The  trial  court  held  that 
the  defendant  Hunter  was  entitled  to  have  $60,000  par  value  of 
the  stock  and  that  the  other  parties  to  the  agreement  should  re- 
ceive $250  par  value  of  stock  each.  This  judgment  was  reversed 

46.  100  N.   Y.   App.   Div.  191,  91  Supp.  620. 


52  THE  LAW  OF  PROMOTERS. 

on  appeal,  the  Appellate  Division  holding  that  the  individuals 
contributing  $250  were  entitled  to  divide  between  themselves 
$40,000  par  value  of  the  capital  stock  of  the  company. 

In  Spier  v.  Hyde,47  the  plaintiff  had,  at  the  request  of  the  de- 
fendants, and  with  a  view  to  the  resale  thereof  at  an  advance,  se- 
cured options  on  10,100  shares  of  the  stock  of  the  Goodson  Type 
Casting  &  Setting  Machine  Company.  The  parties  subsequently 
concluded  that  the  shares  could  be  used  to  better  advantage  by 
the  formation  of  a  new  company  to  take  over  these  shares.  An 
agreement  was  thereupon  entered  into  reciting  that  a  new  com- 
pany should  be  formed,  and  that  it  was  the  intention  of  the  parties 
to  exchange  10,100  shares  of  the  stock  of  the  new  company  for 
an  equal  number  of  shares  of  the  existing  company,  and  to  pool 
the  10,100  shares  of  stock  of  the  new  company.  The  agreement 
provided  that  modifications  and  changes  in  the  plan  proposed 
might  be  made  by  the  defendants.  The  plaintiff  was  to  receive  as 
compensation  for  his  services,  15  per  cent  of  whatever  net  profits 
might  be  realized  by  a  sale  of  the  pooled  stock,  the  contract  pro- 
viding that  "  this  15  per  cent  interest  relates  only  and  applies 
solely,  to  the  10,100  shares  of  stock  of  the  new  company  and  to 
the  net  profits,  if  any,  to  be  derived  from  the  sale  thereof  on 
the  basis  as  above  stated."  The  defendants  afterwards  modified 
the  plan  outlined  in  the  agreement  by  making  the  10,100  shares 
of  stock  of  the  old  company  the  basis  of  the  issue  of  the  entire 
capital  of  the  new  company.  The  court  held  that  the  defendants 
were,  under  the  terms  of  the  contract,  authorized  to  make  -this 
change  of  plan,  but  that  they  could  not  make  such  change  at  the 
expense  of  the  plaintiff  without  his  consent,  and  that  the  latter 
was  entitled  to  15  per  cent  of  the  value  of  the  10,100  shares  of  the 
old  company  and  of  the  stock  of  the  new  company  received  in 
exchange  therefor,  and  that  his  agreement  did  not  restrict  him  to 
15  per  cent  of  10,100  shares  of  stock  of  the  new  company  which 

47.  92  N.   Y.   App.   Div.   467,   87  Supp.  285. 


AGREEMENTS  FOR  PROMOTION.  53 

represented  only  a  part  of  the  shares  issued  in  exchange  for  the 
10,100  shares  of  the  stock  of  the  old  company. 

In  White  v.  Wood,48  the  defendants,  as  trustees  for  the  hold- 
ers of  994  bonds,  of  the  par  value  of  $1,000  each,  of  the  Chatteroi 
Railway  Company,  a  Kentucky  corporation,  purchased  the  prop- 
erty of  that  company  under  foreclosure.  The  agreement  under 
which  the  defendants  were  appointed  provided  that,  in  case  the 
defendants  were  unable  to  sell  the  railroad  within  a  fixed  time,  a 
new  corporation  should  be  organized  to  take  over  the  road,  and 
the  stock  of  such  new  company  issued  and  divided  among  the  bond- 
holders in  proportion  to  the  number  of  bonds  held  and  deposited  by 
them.  The  defendants  organized  a  new  corporation  under  the  laws 
of  Kentucky  with  an  authorized  capital  of  $2,000,000,  of  which 
it  was  agreed  that  $994,000  par  value  should  be  issued  to  the 
bondholders  in  consideration  of  the  conveyance  by  the  defendants 
of  the  property  purchased  by  them  at  foreclosure.  The  plaintiff 
was  the  owner  of  27  bonds  of  the  old  company,  and  brought  suit 
to  restrain  the  transfer  of  the  railroad  to  the  new  company,  claim- 
ing that  he  was  entitled  under  the  agreement  to  a  proportionate 
share  of  the  entire  $2,000,000  capital  stock  of  the  new  corpora- 
tion. The  court  pointed  out  that  the  actual  property  represented 
by  the  stock  to  be  issued  to  the  bondholders  was  precisely  the  same 
whether  there  was  distributed  among  them,  the  entire  $2,000,000 
of  capital  stock  or  only  $994,000,  and  held  that  under  the  laws 
of  Kentucky  the  paid  up  capital  stock  which  the  bondholders 
were  entitled  to  receive  could  not  exceed  the  original  cost  of  the 
road  purchased ;  that  the  plaintiffs  would  have  a  right  to  complain 
had  the  defendants  intentionally  fixed  the  amount  of  the  paid  up 
capital  stock  to  be  issued  to  the  bondholders  at  less  than  the 
value  of  the  property  purchased,  but  as  it  was  not  suggested  that 
they  had  done  this,  and  as  there  was  no  evidence  that  they  had 
acted  in  bad  faith,  the  plaintiff  had  no  cause  for  complaint. 

48.  129  N.  Y.  527,  29  N.  E.  835. 


54  THE  LAW  OF  PROMOTERS. 

In  Burdette  v.  Universal  Cleanser  &  Mfg.  Co.,49  the  plaintiff 
agreed  to  sell  his  one-tenth  interest  in  a  certain  business  known  as 
the  Universal  Manufacturing  Company  under  an  agreement  that 
a  corporation  should  be  organized  to  take  over  such  business,  and 
that  the  plaintiff  should  "  have  a  full  one-tenth  interest  represented 
by  this  sale  in  said  corporation."  The  court  held  that  the  plain- 
tiff was  entitled  to  receive  one-tenth  of  the  issued  stock  but  could 
not  insist  on  a  full  one-tenth  of  the  authorized  capital,  a  large 
part  of  which  had,  pursuant  to  the  agreement  of  the  organizers, 
been  returned  to  the  treasury  for  the  use  of  the  corporation. 

In  Hennessy  v.  Griggs,50  the  parties  entered  into  an  agreement 
to  form  a  copartnership  under  the  name  of  Dakota  Gas  &  Fuel 
Company,  it  being  agreed  that  the  copartnership  should,  as  soon 
as  possible,  proceed  to  organize  a  corporation  under  the  same 
name  to  take  over  the  partnership  property.  The  agreement  pro- 
vided that  "  the  capital  of  said  copartnership  shall  consist  of 
$50,000, — Alexander  Griggs  to  furnish  $5,000 ;  Thomas  Hennessy, 
$10,000;  and  J.  S.  Eshelman,  $10,000;  the  remaining  $25,000 
to  be  held  by  Griggs,  to  be  by  him  negotiated  and  raised  to  and 
from  certain  persons  in  St.  Paul,  Minn."  The  plaintiff  claimed 
that  the  capital  to  be  furnished  by  Griggs,  Hennessy  and  Eshel- 
man was  nominal  only,  that  they  were  to  pay  in  no  money,  but 
that  their  services  as  copartners  were  to  be  accepted  as  such 
capital,  and  that  the  works  were  to  be  constructed  with  the 
$25,000  to  be  raised  from  outside  parties.  The  court  held  that 
such  was  not  the  contract,  that  the  capital  to  be  furnished  by 
these  parties  was  to  be  actual  capital  and  that  no  compensation 
was  to  be  paid  for  services. 

It  was  held  in  A.  J.  Cranor  Co.  v.  Miller  51  that  an  agreement 
providing  that  one-fourth  of  the  capital  stock  of  the  proposed 
corporation  should  be  issued  to  the  owner  of  a  certain  mill  prop- 
erty in  payment  therefor,  and  the  other  three-fourths  to  the  pro- 

49.  44  Utah  275,  140  Pac.  119.  51.  147  Ala.  268,  41  So.  678. 

50.  1  N.  D.  52,  44  N.  W.  1010. 


AGREEMENTS  FOR  PROMOTION.  55 

moter,  intended,  not  that  three-fourths  of  the  capital  stock  should 
be  issued  to  the  promoter  without  consideration,  but  that  such 
stock  should  be  paid  for  by  him. 

§  35.  Interpretation  of  agreements  restricting  sale  of  shares. 

In  Burden  v.  Burden,52  the  parties  agreed  to  organize  a  corpo- 
ration with  a  total  capital  of  2,000  shares,  of  which  the  defend- 
ant was  to  have  1,000,  the  plaintiff  998  shares,  and  one  Arts  2 
shares.  The  defendant  agreed  with  the  plaintiff  that  if  he,  the 
defendant,  should  at  any  time  sell  998  of  his  1,000  shares,  then 
he  would,  without  consideration,  transfer  the  other  two  shares 
to  the  plaintiff.  It  was  further  agreed  that  Arts  should  not 
receive  any  dividends  on  his  shares,  but  should  receive  a  salary 
in  lieu  thereof,  and  that  all  the  profits  were  to  be  divided  equally 
between  the  plaintiff  and  the  defendant.  Thereafter  the  defend- 
ant caused  the  corporation  to  increase  the  number  of  its  directors 
from  three  to  five,  and  transferred  to  the  new  directors  their 
qualifying  shares.  The  plaintiff  brought  suit,  claiming  that  the 
defendant  was  by  the  agreement  prohibited  from  making  any  dis- 
position of  his  shares,  except  a  single  sale  of  998  shares,  accom- 
panied by  a  transfer  to  the  plaintiff  of  the  remaining  two  shares.. 
The  court  held  that  the  agreement  did  not  intend  that  the  defend- 
ant must  sell  998  shares  at  one  time,  but  merely  that  when  the 
defendant  had  by  one  sale,  or  by  a  number  of  sales,  disposed  in  the 
aggregate  of  998  shares,  he  must  then  transfer  his  remaining 
two  shares  to  the  plaintiff. 

52.  159  N.  Y.  287,  54  N.  E.  17. 


CHAPTER  III. 

OF  THE  ENFORCEMENT  OF  AGREEMENTS  FOR  THE  PROMOTION  OF 

CORPORATIONS. 

Section   36.  Introductory. 

37.  Specific  performance  of  agreements  to  promote  corporation. 

38.  Specific    performance    where    corporation    has    not    been    or- 
ganized. « 

39.  Specific  performance  after  corporation  has  been  organized. 

40.  Actions  of  accounting. 

41.  Action  to  compel  corporation  to  issue  shares. 

42.  Actions  for  damages. — Definiteness  of  agreement. 

43.  Measure  of  damages. 

44.  Action  to  recover  property  conveyed,  or  value  thereof. 

45.  Actions  to  enforce  mechanics'  liens. 

§  36.  Introductory. 

When  it  has  been  found  that  a  valid  agreement  for  the  promo- 
tion of  a  corporation  has  been  broken,  the  next  question  to  be 
considered  is  that  of  the  remedy  of  the  party  aggrieved.  The 
primary  remedy,  that  of  an  action  at  law  for  damages,  is  often, 
because  of  the  difficulty  or  impossibility  of  making  satisfactory 
proof  of  the  damages,  inadequate.  A  search  for  some  more  satis- 
factory form  of  relief  necessarily  results. 

§  37.  Specific  performance  of  agreement  to  promote  corporation. 
A  remedy  which  immediately  suggests  itself  is  that  of  an  action 
for  specific  performance.  Actions  for  the  specific  performance 
of  contracts  for  the  promotion  of  corporations  divide  themselves 
into  two  classes;  actions  in  which  the  contemplated  corporation 
has  been  organized,  and  all  that  the  court  is  required  to  do  is  to 
decree  the  transfer  of  shares  in  accordance  with  the  agreement, 

(56) 


ENFORCEMENT  OF  AGREEMENTS.  57 

and  actions  in  which  the  corporation  has  not  been  organized  and 
the  court  is  asked,  not  merely  to  decree  the  issue  and  transfer  of 
shares,  but  to  order  and  supervise  the  organization  of  a  corpo- 
ration. 

§  38.  Specific  performance  where  corporation  has  not  been 
organized. 

An  action  for  the  specific  performance  of  an  agreement  to 
organize  a  corporation,  involving  the  formation  of  a  company 
under  the  direction  of  the  court,  presents  almost  insurmountable 
difficulties.  Relief  of  that  character  has  been  denied  on  the 
ground  that  the  covenants  to  be  performed  by  the  plaintiff  were 
such  that  specific  performance  thereof  could  not  be  decreed,1  on 
the  ground  that  some  of  the  parties  to  the  agreement  were  in- 
solvent and  could  not  perform,2  on  the  ground  that  the  contract 
in  suit  was  not  sufficiently  definite,3  and  on  the  ground  that  the 
parties  were  hostile  and  unfriendly.4 

All  of  these  are  valid  objections,  and  the  last  two  none  the 
less  so  because  they  apply  to  substantially  every  action  of  the 
character  under  consideration.  It  is  difficult  to  imagine  an  agree- 
ment setting  forth  with  particularity  each  of  the  innumerable 
matters  to  be  determined  upon  the  organization  of  a  corporation, 
and  a  case  is  not  likely  to  arise  in  which  the  parties  to  an  action 
for  the  specific  performance  of  an  agreement  to  form  a  corpo- 
ration, come  into  court  in  an  amicable  and  friendly  spirit.  It 
might,  perhaps,  be  categorically  stated  that  an  agreement  to  form 
a  corporation  will  not  be  specifically  enforced.5 

1.  Stocker  v.  Wedderburn,  3  K.  &  4.  Rudiger  v.  Coleman,  112  N.  Y. 
J.  393.  App.  Div.  279,  98  Supp.  461. 

2.  Hernreich  v.   Lidberg,  105  111.  5.  Avery   v.    Ryan,    74   Wis.   591, 
App.  495.  597^598,  43  N.  W.  317,  319 ;  Rudiger 

3.  Brown  v.  Swarthout,  134  Mich.  v.  Coleman,  112  N.  Y.  App.  Div.  279, 
585,  96  N.  W.  951;   Loewenberg  v.  98  Supp.  461;  Perrin  v.  Smith,  135 
DeVoigne,  145  Mo.  App.  710,  123  S.  N.  Y.  App.  Div.  127,  119  Supp.  990. 
W.  99. 


58  THE  LAW  OF  PROMOTERS. 

§  39.  Specific  performance  after  corporation  has  been  organized. 

If  the  corporation  contemplated  by  the  agreement  of  the 
parties  has  been  organized,  an  action  to  specifically  enforce  the 
provisions  relating  to  the  -division  or  transfer  of  its  shares  may 
often  be  successfully  maintained.6  It  is,  in  such  cases,  necessary 
to  show  that  the  corporation  organized  is  actually  the  corpora- 
tion contemplated  by  the  parties.  This  is  a  question  of  fact,7  and 
though  there  be  some  difference  in  detail  between  the  corporation 
contemplated  and  that  organized,  the  parties  who  organized  the 
corporation  and  are  responsible  for  the  departure  from  the  pre- 
cise original  scheme,  will  not  readily  be  permitted  to  escape  the 
performance  of  their  engagements,  if  the  company  as  organized 
substantially  conforms  to  that  contemplated  by  the  agreement 
of  the  parties.8 

Specific  performance  of  a  contract  relating  to  the  sale  or  trans- 
fer of  corporate  shares  will  not  be  decreed  if  the  remedy  at  law 
is  adequate.  If  the  shares  of  the  company  are,  at  or  about  the 
time  of  the  breach  of  contract  complained  of,  bought  and  sold  in 
the  open  market  so  that  the  desired  shares  can  easily  be  obtained 
and  their  market  value  be  readily  established,  complete  relief  may 
ordinarily  be  had  at  law  and  a  resort  to  equity  is  unnecessary.9 

Though  no  market  value  has  been  established  and  the  shares 
cannot  be  readily  purchased,  it  does  not  necessarily  follow  that 
the  remedy  at  law  is  inadequate.  The  measure  of  damages  in 
such  case  depends  upon  the  intrinsic  value  of  the  shares.  Proof 
of  the  intrinsic  value  is  not  necessarily  a  matter  of  great  diffi- 
culty. If  the  corporation  is  organized  to  take  over  real  or  per- 

6.  The    corporation     may     be    a      612,  24  Supp.  599. 

proper,  but  is  not  a  necessary,  party  8.  Dennison  v.  Keasbey,  200  Mo. 

to  such  suit.    Williamson  v.  Krohn,  408,  98  S.  W.  546.  Cf.  Hennessy  v. 

66  Fed.  Rep.  655,  661,  13  C.  C.  A.  Griggs,  1  N.  D.  52,  44  N.  W.  1010. 

668,  31  U.  S.  App.  325.  9.  Bernier  v.  Griscom  Spencer  Co., 

7.  Crichfleld    v.    Julia,    147    Fed.  161  Fed.  Rep.  438;  Avery  v.  Ryan, 
Rep.  65,   77  C.   C.  A.  297,  and  see  74  Wis.  591,  43  N.  W.  317,  and  casea 
Sessions  v.  Elwell,  71  Hun  (N.  Y.)  cited  in  succeeding  notes. 


ENFORCEMENT  OF  AGREEMENTS. 


59 


sonal  property,  or  an  existing  enterprise  or  business,  of  readily 
ascertainable  value,  the  matter  of  proving,  to  a  reasonable  de- 
gree of  certainty,  the  intrinsic  value  of  the  shares,  presents  no  in- 
surmountable difficulties  and  a  decree  of  specific  performance  will 
generally  be  denied.10  If,  however,  the  value  of  the  shares  de- 
pends upon  the  commercial  value  of  some  novel  patent  or  device, 
or  upon  the  success  of  some  theretofore  untried  enterprise,  or 
upon  the  successful  operation  of  a  new  mine,  or  of  a  projected 
railroad,  the  accurate  determination  of  the  intrinsic  value  of  the 
shares  is  impossible.  The  value  of  the  shares  of  a  corporation 
organized  to  develop  such  an  enterprise  becomes  a  matter  of 
even  greater  uncertainty  if  the  shares  are,  as  is  often  the  case,  sub- 
ject to  the  prior  rights  of  bondholders  or  preferred  stockholders. 
The  intrinsic  value  of  the  shares  can  in  these  cases  not  be  com- 
puted or  with  any  reasonable  degree  of  certainty  ascertained,  and 
if  no  market  value  has  been  established,  a  court  of  equity  will, 
according  to  the  great  weight  of  authority,  decree  specific  per- 
formance of  the  agreement  to  sell  or  transfer  the  shares.11 


10.  Clements   v.    Sherwood-Dunn, 
108  N.  Y.  App.  Div.  327,  95  Supp. 
766,  affirmed  without  opinion,  187  N. 
Y.  521,  70  N.  E.  1102;  Bateman  v. 
Straus,  86  N.  Y.  App.  Div.  540,  83 
Supp.  7.85;  Ehrich  v.  Grant,  111  N. 
Y.  App.  Div.  196,  198,  97  Supp.  600. 
But  see  Selover  v.  Isle  Harbor  Land 
Co.,  91  Minn.  451,  98  N.  W.  344,  100 
Minn.  253,  111  N.  W.  155. 

11.  Federal. — Krohn    v.    William- 
son, 62  Fed.  Rep.  869,  877,  affirmed, 
sub  nom.  Williamson  v.  Krohn,  66 
Fed.  Rep.  655,  13  C.  C.  A.  668,  31  U. 
S.  App.  325. 

California. — Krouse  v.  Woodward, 
110  Cal.  638,  42  Pac.  1084;  Trea- 
surer v.  Commercial  Mining  Co.,  23 
Cal.  390;  Wait  v.  Kern  River  Min. 
Mill.  &  Dev.  Co.,  157  Cal.  16,  106 


Pac.  98 ;  Sherwood  v.  Wallin,  1  Cal. 
App.  532,  82  Pac.  566. 

Illinois. — Ames  v.  Witbeck,  179 
111.  458,  53  N.  E.  969. 

Iowa. — Schmidt  v.  Pritchard,  135 
Iowa  240,  112  N.  W.  801. 

Minnesota. — Selover  v.  Isle  Har- 
bor Land  Co.,  91  Minn.  451,  98  N. 
W.  344,  100  Minn.  253,  111  N.  W. 
155;  Northern  Trust  Co.  v.  Mark- 
ell,  61  Minn.  271,  63  N.  W.  735. 

Missouri. — Butler  v.  Murphy,  106 
Mo.  App.  287,  80  S.  W.  337;  Denni- 
son  v.  Keasbey,  200  Mo.  408,  98  S. 
W.  546;  Baumhoff  v.  St.  Louis  &  K. 
R.  Co.,  205  Mo.  248,  104  S.  W.  5,  120 
Am.  St.  Rep.  745. 

Nevada. — Turley  v.  Thomas,  31 
Nev.  181,  101  Pac.  568,  135  Am.  St 
R.  667. 


60 


THE  LAW  OF  PROMOTERS. 


Some  jurisdictions  allow  an  action  for  specific  performance  in 
any  case  in  which  it  appears  that  the  shares  which  the  plaintiff 
has  contracted  to  purchase  cannot  be  obtained  elsewhere  than 
from  the  defendant.12  There  is  much  to  be  said  in  support  of 
this  rule.  If  one  has  agreed  to  transfer  to  another  the  shares  of 
a  corporation  but  refuses  so  to  do,  and  the  promissor  is  the 
owner  of  the  shares  which  he  has  agreed  to  transfer  and  is  able 
1  to  complete  his  contract,  the  simplest  and  surest  method  of  doing 


New  Jersey. — Safford  v.  Barber, 
74  N.  J.  Eq.  352,  70  Atl.  371. 

Netv  York. — Rau  v.  Seidenberg,  53 
N.  Y.  Misc.  386,  104  Supp.  798;  Gil- 
bert v.  Bunnell,  92  N.  Y.  App.  Div. 
284,  86  Supp.  1123. 

Pennsylvania. — Goodwin  Co.'s  Ap- 
peal, 117  Pa.  514,  12  Atl.  736,  2  Am. 
St.  Rep.  696. 

Rhode  Island. — Manton  v.  Ray,  18 
R.  I.  672,  29  Atl.  998. 

Cf.  Hyer  v.  Richmond  Traction 
CO.,  168  U.  S.  471,  483,  42  L.  Ed.  547, 
18  S.  C.  114,  where  the  Court  held 
— two  judges  dissenting — that  the 
plaintiff's  remedy  at  law  was  ade- 
quate as  the  present  value  of  the 
franchise  of  the  new  company,  and 
of  its  capital  stock,  were  not 
wholly  beyond  estimate,  though  their 
value  three  or  four  years  later  was 
uncertain  and  might  depend  upon 
the  management.  The  Supreme 
Court  seems  in  this  case  to  have 
further  decided  that  specific  per- 
formance would  not  be  decreed,  as 
the  contract  of  the  parties  contem- 
plated a  partnership  to  operate  a 
traction  franchise,  while  the  ordi- 
nance granting  the  franchise  created 
the  parties  to  whom  it  was  granted, 
a  corporation.  The  reasoning  seems 
to  be  that  a  court  of  equity  will 


not  decree  specific  performance  of 
an  agreement  to  form  a  partnership, 
and  that  there  was  no  agreement  to 
transfer  shares  of  stock  to  the  plain- 
tiff. The  reasoning  of  the  majority 
of  the  court  may  accord  with  strict 
logic,  but  one  cannot  but  feel  that 
more  exact  justice  would  have  been 
attained  by  the  adoption  of  the 
views  of  the  minority. 

On  the  question  of  specific  per- 
formance of  agreements  relating  to 
the  sale  and  transfer  of  shares,  see 
note  to  Ryan  v.  McLane,  50  L.  R.  A. 
501,  and  note  to  Hogg  v.  McGuffin,  31 
L.  R.  A.  N.  S.  491,  and  note  to  Tur- 
ley  v.  Thomas,  135  Am.  St.  R.  667, 
689. 

12.  Federal. — Megibben's  Adm'rs 
v.  Perin,  49  Fed.  Rep.  183,  affirmed, 
53  Fed.  Rep.  86,  3  C.  C.  A.  443,  6  U. 
S.  App.  348. 

Illinois.— Hills  v.  McMunn,  232  111- 
488,  83  N.  E.  963. 

Iowa. — Schmidt  v.  Pritchard,  135 
Iowa  240,  112  N.  W.  801. 

Oregon. — Deitz  v.  Stephenson,  51 
Or.  596,  95  Pac.  803. 

Pennsylvania. — Northern  Central 
Railway  Co.  v.  Wai  worth,  193  Pa. 
207,  44  Atl.  253,  74  Am.  St.  Rep.  683. 

See  also  Cook  on  Corporations 
(7th  ed.),  §  338. 


ENFORCEMENT  OF  AGREEMENTS.  (Jl 

exact  justice  between  the  parties  is  to  direct  the  carrying  out 
of  the  precise  agreement.  Justice  Story  says  that  "  it  is  against 
conscience  that  a  party  should  have  a  right  of  election  whether 
he  would  perform  his  covenant  or  only  pay  damages  for  the 
breach  of  it.  But,  on  the  other  hand,  there  is  no  reasonable  ob- 
jection to  allowing  the  other  party  who  is  injured  by  the  breach 
to  have  an  election  either  to  take  damages  at  law  or  to  have  a 
specific  performance  in  equity."  13 

It  should  furthermore  be  said  that  specific  performance  of  an 
agreement  to  transfer  shares  may  sometimes  be  decreed  if  the 
aggrieved  party  proves  that  the  shares  have  to  him  some  special 
or  peculiar  value  which  cannot  be  measured  in  money  damages.14 

A  court  of  equity  does  not  direct  performance  of  the  impossi- 
ble and,  therefore,  refuses  to  decree  specific  performance  of  an 
agreement  to  transfer  shares  if  it  appears  that  the  defendant  is 
neither  the  legal  nor  equitable  owner  of  the  shares  in  suit.15  If  the 
plaintiff  would,  but  for  the  inability  of  the  defendant  to  per- 
form, have  been  entitled  to  a  decree  of  specific  performance,  a 
court  of  equity  will,  while  refusing  to  make  such  decree,  retain 
jurisdiction  and  render  judgment  for  money  damages.16  If,  how- 
ever, it  appears  that  the  plaintiff,  before  he  commenced  his  ac- 
tion, knew  that  specific  performance  of  his  agreement  was,  or  had 
become,  impossible,  his  action  in  equity  will  be  dismissed.17 

An  agreement  for  the  organization  of  a  corporation  and  the 

13.  Story's  Equity  Jurisprudence  15.  Ryan  v.  Martin,  165  Fed.  Rep. 
(13tn  Ed.),  §  717a.    Quoted,  but  not  765;  Jones  v.  Tunis,  99  Va.  220,  37 
altogether  approved  of,  in  Johnson  S.  E.  841 ;  Columbine  v.  Chichester, 
v.  Brooks,  93  N.  Y.  337,  343.  2  Phillips  27. 

14.  Moulton  v.  Warren  Mfg.  Co.,  16.  Altoona,   etc.,   Co.   v.    Kittan- 
81  Minn.  259,  83  N.  W.  1082 ;  Butler  ning,    etc.,    Railway    Co.,    126    Fed. 
v.  Wright,  186  N.  Y.  259,  78  N.  E.  Rep.  559 ;  Jones  v.  Tunis,  99  Va.  220, 
1002,  37  N.  Y.  Civ.  Proc.  253 ;  Sher-  37  S.  E.  841. 

man  v.  Herr,  220  Pa.  420,  69  Atl.  17.  Jones  v.  Tunis,  99  Va.  220,  37 

899.  S.  E.  841. 

See  note  to  Turley  v.  Thomas,  135  Cf.  Hogg  v.  McGuffin,  67  W.  Va. 

Am.  St.  Rep.  689.  456,  68  S.  E.  41,  31  L.  R.  A.  N.  S. 


€2 


THE  LAW  OF  PROMOTERS. 


division  or  transfer  of  its  shares  cannot  be  specifically  enforced 
by  a  court  of  equity,  unless  the  agreement  is  so  drawn  that  the 
rights  of  the  parties  can  be  definitely  ascertained.  It  is  not, 
however,  necessary  that  every  detail  of  the  scheme  of  incorpora- 
tion should  be  set  out  in  the  agreement.  If  the  properties  to  be 
conveyed,  or  the  services  to  be  performed  by  the  parties,  and 
the  shares  to  be  received  in  payment  therefor,  are  clearly  stated, 
the  agreement  is  sufficiently  definite,  and  if  a  company  is  organ- 
ized in  substantial  compliance  with  the  scheme  outlined  in  the 
agreement,  specific  performance  of  the  provisions  relating  to  the 
transfer  of  the  shares  may  be  enforced.18 

It  is,  however,  necessary  to  keep  in  mind  that  the  granting 
of  a  decree  of  specific  performance  of  a  contract  relating  to  per- 
sonal property,  rests  always  in  the  sound  discretion  of  the  court, 
and  that  such  decree  will  be  denied  if  the  court  deems  that  the 
granting  thereof  would  work  a  hardship,  and  that  justice  would 
not  result  therefrom.19 

§  40.  Actions  of  accounting. 

Relief  similar  in  effect  to  that  obtained  by  an  action  for 
specific  performance,  is  sometimes  had  by  an  action  to  enforce  a 
trust  or  to  compel  an  accounting  for  the  shares  issued  to  the 
promoters.20  The  plaintiff  must,  in  order  to  succeed  in  an  action 


401,  where  the  court  gave  the  plain- 
tiff a  lien  upon  the  purchase  money 
for  the  shares  not  yet  paid  by  the 
innocent  purchaser  thereof. 

18.  Butler    v.    Murphy,    106    Mo. 
App.  287,  80  S.  W.  337.     Cf.  Burke 
v.  Mead,  159  Ind.  252,  64  N.  E.  880. 
See  post,  §  42. 

19.  Newton  v.  Wooley,  105  Fed. 
Rep.  541 ;  Williams  v.  Montgomery, 
148  N.   Y.   519,   527,   43  N.    E.   57; 
Butler  v.  Wright,  186  N.  Y.  259,  78 
N.  E.  1002,  37  Civ.  Proc.  253 ;  Bate- 
man  v.  Straus,  86  N.  Y.  App.  Div. 


540,  83  Supp.  785;  Gilbert  v.  Bun- 
nell,  92  N.  Y.  App.  Div.  284,  86  Supp. 
1123;  Brown  v.  Britton,  41  N.  Y. 
App.  Div.  57,  58  Supp.  353. 

20.  Federal.— Krohn  v.  William- 
son, 62  Fed.  Rep.  869,  877,  affirmed, 
SM&  nom.  Williamson  v.  Krohn,  66 
Fed.  Rep.  655,  13  C.  C.  A.  668,  31  U. 
S.  App.  325;  Harvey  v.  Sellers,  115 
Fed.  Rep.  757;  Warner  v.  Wood, 
200  Fed.  Rep.  542,  118  C.  C.  A.  636. 

Alabama- — Howison  v.  Baird,  145 
Ala.  683,  40  So.  94. 

Arizona* — Philes     v.     Hickies,     2 


ENFORCEMENT  OF  AGREEMENTS.  63 

•of  this  character,  show  something  more  than  a  mere  contract  to 
organize  a  company  and  transfer  to  him  a  portion  of  the  share 
capital.  If  the  plaintiff  has  transferred  property  to  the  defend- 
ant under  an  agreement  that  such  property  is  to  be  transferred  to 
a  corporation  and  its  shares  issued  to  the  plaintiff  in  payment, 
and  the  defendant  transfers  the  property  to  the  corporation  and 
receives  the  shares  therefor,  he  holds  such  shares  as  agent  or 
trustee  for  the  plaintiff  and  may  be  compelled  to  account  there- 
for. Some  fact  upon  which  a  finding  of  a  partnership  or  trust 
relation  can  be  predicated  must,  however,  be  shown  in  order  that 
an  action  of  this  character  may  be  maintained.21 

§  41.  Action  to  compel  corporation  to  issue  shares. 

If  the  plaintiff  has  transferred  his  property  directly  to  the 
corporation,  under  an  agreement  that  he  is  to  receive  shares  of 
the  corporation  in  payment,  the  courts  may  treat  the  plaintiff 
as  the  owner  of  the  shares  and  direct  the  corporation  to 
issue  stock  certificates  to  him.22  An  action  of  this  character  can 

Ariz.  407,  18  Pac.  595,  affirmed  for  In  Badgerow  v.  Manhattan  Trust 

want  of  prosecution,  154  U.  S.  505,  Co.,  64  Fed.  Rep.  931,  the  court  sus- 

14  Sup.  Ct.  1147.  tained  an  action  to  impress  a  lien 

California. — Hunt    v.    Davis,    135  upon  the  securities. 

Cal.  31,  66  Pac.  957.  21.  Everett  v.  Defontaine,  78"  N. 

Colorado. — Farris     v.     Wirt,     16  Y.    App.    Div.    219,    79    Supp.    692; 

Colo.  App.  1,  63  Pac.  946.  Avery  v.  Ryan,  74  Wis.  591,  43  N. 

New  York. — King  v.  Barnes,  109  W.  317;  Cf.  Dickerson  v.  Appleton, 

N.  Y.  267,  16  N.   E.  332 ;   Spier  v.  195  N.  Y.  507,  88  N.  E.  1117,  affirm- 

Hyde,  92  N.   Y.  App.  Div.  467,  87  ing,  123  N.   Y.   App.   Div.   903,  108 

Supp.  285.  Supp.  293. 

Wisconsin. — Bannen    v.    Kindling,  22.  Anthony  v.  American  Glucose 

142  Wis.  613,  126  N.  W.  5.  Co.,  146  N.  Y.  407,  41  N.  E.  23. 

United  Kingdom   and  Colonies. —  In  Wait  v.  Kern  River  Min.  Mill. 

McNeil  v.   Fultz,  38  Can.   Sup.  Ct.  &  Dev.  Co.,  157  Cal.  16.  106  Pac.  98, 

198.  the  plaintiff  showed  that  he  was  en- 

The  right  to  the  shares  is  not  en-  titled  to  receive  245,000  shares  from 

forceable  as  against  a  bona  fide  pur-  the   individual   defendant   who  had 

chaser  thereof.    Thurber  v.  Cninjp,  absconded    and    could    not    be   per- 

86  Ky.  408,  6  S.  W.  145.  sonally   served.     It   appearing  that 


(J4  THE  LAW  OF  PROMOTERS. 

be  maintained  in  any  case  where  the  facts  are  such  that  the  plain- 
tiff may  be  treated  as  the  owner  of  the  shares,  and  the  court  is 
called  upon  only  to  decree  the  issue  of  proper  certificates.23 

§  42.  Actions  for  damages. — Definiteness  of  agreement. 

A  remedy  which  is  always  open  to  every  party  complaining 
of  the  breach  of  an  enforceable  agreement,  is  an  action  at  law  for 
the  recovery  of  the  money  damages  suffered  by  reason  of  the 
breach.24 

The  party  bringing  an  action  for  damages  for  the  breach  of 
an  agreement  to  form  a  corporation  must,  in  order  *to  recover, 
show  the  making  of  a  contract  in  terms  sufficiently  definite  to 
form  a  basis  for  the  computation  of  damages.  The  property  that 
is  to  go  into  the  corporation  and  the  proportionate  part  of  the 
capital  stock  to  be  issued  to  the  plaintiff  must  be  substantially 
fixed,  otherwise  it  cannot  be  determined  what  the  plaintiff  was 
entitled  to  receive,  or  what  damages  he  has  suffered  by  reason  of 
the  breach.25  If  the  agreement  fixes,  with  reasonable  certainty, 

such  absconding  defendant  was  en-  Walsh,  36  Wash.  190,  78  Pac.  786. 

titled  to  receive  from  the  defendant  25.  See  Haskins  v.   Ryan,   71  N. 

corporation      more      than      245,000  J.  Eq.  575,  581,  64  Atl.  436;  Watson 

shares,    such    corporation    was    by  v.  Bayliss,  71  Wash.  499,  128  Pac. 

the  court  directed  to  issue  245,000  1061. 

of  the  individual  defendant's  shares,  The  court  in  Flaherty  v.  Gary,  62 

directly  to   the   plaintiff.  N.  Y.  App.  Div.  116,  70  Supp.  951, 

23.  Chater      v.      San      Francisco  affirmed,    174   N.    T.   550,    67   N.    E. 
Sugar    Refining    Co.,    19    Cal.    219,  1082,  defeated  the  plaintiff  on  the 
seems   to   have   been   an   action   of  ground   that    the   agreement   under 
this  character.     See  also  Chambers  consideration  was  a  mere  agreement 
v.  Mittnacht,  23  S.  D.  449, 122  Nl  W.  to  assist  the  plaintiff  in  forming  a 
434.  corporation    and    not    an    absolute 

Cf.  Dickinson  v.  Matheson  Motor  agreement  to  form  the  corporation. 

Car  Co.,  161  Fed.  Rep.  874,  affirmed,  See  also    Porter   v.   Blair,   83   Fed. 

171  Fed.  Rep.  646,  97  C.  C.  A.  29.  Rep.  104;  Brehm  v.  Sperry,  92  Md. 

24.  Crichfield   v.    Julia,   147   Fed.  378,  403,  48  Atl.  368,  372. 

Rep.  65,  77  C.  C.  A.  297;  Perrin  v.  A  mere  agreement  to  make  a  de- 
Smith,  135  N.  Y.  App.  Div.  127,  119  finite  agreement  is  not  enforceable. 
Supp.  990;  Kirschmann  v.  Lediard,  See  Haskins  v.  Ryan,  71  N.  J.  Eq. 
61  Barb.  (N.  Y.)  573;  Grant  v.  575,  64  Atl.  436. 


ENFORCEMENT  OF  AGREEMENTS.  55 

the  assets  to  be  transferred  to  the  corporation,  the  total  share 
capital,  and  the  portion  thereof  which  the  plaintiff  is  to  receive, 
or  contains  definite  provisions  from,  which  the  relation  between 
these  factors  may  be  computed,  the  courts  will  not,  or  at  least 
should  not,  be  too  astute  in  discovering  uncertainties  by  reason 
of  which  the  plaintiff's  right  of  recovery  may  be  defeated.26 

In  Crichfield  v.  Julia,27  the  defendant  agreed  to  pay  the  plain- 
tiff for  his  asphalt  mine  $5,000  in  cash  and  $100,000  in  guar- 
anteed 6  per  cent  preferred  shares  of  a  corporation  to  be  organ- 
ized to  operate  the  mine.  The  agreement  did  not  fix  the  capital- 
ization of  the  proposed  company,  its  bonded  indebtedness,  or  even 
the  total  amount  of  the  preferred  stock  of  which  the  plaintiff  was 
to  receive  $100,000  par  value.  It  was  claimed  that  the  contract 
was  too  indefinite  for  enforcement.  The  court  said  that  the 
amount  of  common  stock  that  might  be  issued  was  immaterial  as 
such  common  stock  would  be  subject  to  the  preferred  stock  and 
would  not  affect  its  value;  that  in  the  absence  of  any  words  or 
definition  of  limitation,  "  the  use  of  the  term  *  preferred  stock,'  in 
connection  with  defendant's  guaranty  of  interest,  may  fairly 
be  taken  to  indicate  stock  whose  par  value  is  to  be  based  upon 
the  actual  value  of  the  property  it  represents,  and  not  upon  any 
fictitious  or  speculative  value.  If  the  stock  were  so  affected  by 
a  bonded  indebtedness  as  not  to  have  a  substantial  value  repre- 
senting a  par  value  it  would  be  a  preferred  stock  merely  in  name, 
and  would  not  represent  the  understanding  of  the  parties  as  evi- 
denced by  the  agreement  and  the  defendant's  guaranty."  The 
contract  was  held  sufficiently  definite  to  enable  a  jury  to  estimate 
the  value  of  the.  preferred  stock  which  the  plaintiff  was  under  his 
contract  entitled  to  receive. 

In  Waring  &  Gillow,  Ltd.,  v.  Thompson,28  it  was  held  that  be- 
cause of  the  indefiniteness  of  the  contract  to  form  the  corporation, 

26.  Crichfield   v.   Julia,   147   Fed.          27.  147  Fed.  Rep.  65,  77  C.  C.  A. 
Rep.  65,  77  C.  C.  A.  297.     But  see      297. 
cases  cited  under  notes  28  and  29.  28.  London  Times,  Feb.  9,  1912. 


55  THE  LAW  OF  PROMOTERS. 

which  "  left  open  for  future  agreement  a  number  of  points,  e.  g., 
the  memorandum  and  articles  of  association,  the  borrowing  and 
other  powers  of  the  company,  and  the  plaintiffs'  percentage  of 
profit,  with  other  matters,"  the  plaintiffs  could  not  recover 
damages  for  the  breach  thereof.  The  case  is  not  satisfactorily 
reported.  If  the  percentage  of  the  profits  to  be  paid  to  the 
plaintiffs  was  left  open  for  future  determination,  the  decision  that 
the  contract  was  too  indefinite  for  enforcement  was  correct.  The 
fact  that  the  memorandum  and  articles  of  association  and  the 
borrowing  and  other  powers  of  the  company  had  not  been  agreed 
upon,  was,  however,  no  reason  for  denying  the  plaintiffs'  re- 
lief in  an  action  for  damages.  An  understanding  that  the  com- 
pany shall  be  organized  upon  a  reasonable  basis  may  be  implied, 
and  the  absence  of  a  definite  understanding  in  regard  to  matters 
not  constituting  a  necessary  factor  in  the  computation  of  the 
value  of  the  shares  is  no  reason  for  denying  relief  in  damages.29 

§  43.  Measure  of  damages. 

The  measure  of  damages  in  an  action  for  the  breach  of  a  con- 
tract to  organize  a  corporation  to  purchase  the  plaintiff's  prop- 
erty and  pay  for  it  in  shares,  is  the  amount  the  plaintiff  would 
have  gained  by  the  performance  of  the  contract.  If  the  plaintiff's 
property  has  been  conveyed  to  the  corporation,  or  to  the  defend- 
ants, the  measure  of  damages  is  the  value  of  what  the  plaintiff 
was  to  receive.  If  the  plaintiff  has  not  parted  with  his  property, 
the  measure  of  his  damages  is  the  difference  between  the  value  of 
the  property  which  he  agreed  to  convey  and  the  value  of  what  he 
was  to  receive  under  his  contract.30 

If  the  shares  in  which  the  plaintiff  was  to  be  paid  are,  at  the 
time  of  the  breach,  bought  and  sold  in  the  open  market  to  such 

20.  See,     however,     Flaherty     v.  son  v.   Bayllss,   71   Wash.  499,  128 

Gary,  62  N.   Y.   App.  Div.   116,   70  Pac.  1061. 

Supp.  951,  affirmed  without  opinion,  30.  Kirschmann    v.    Lediard,    61 

174  N.  Y.  550,  67  N.  E.  1082;  Wat-  Barb.  (N.  Y.)  573. 


ENFORCEMENT  OF  AGREEMENTS.  gj 

an  extent  that  their  market  value  has  been  fixed,  this  market  value 
forms  the  measure  of  the  value  of  the  shares.  The  difficulty  with. 
the  action  for  damages  is  that  the  shares,  have,  in  most  cases,  at 
the  time  of  the  breach,  no  market  value,  and  a  market  value  is,  in 
many  cases,  never  established. 

The  fact  that  no  market  value  for  the  shares  was  ever  established 
does  not  defeat  the  plaintiff's  action,  or  restrict  his  recovery  to 
nominal  damages.  In  Stanton  v.  New  York  &  Eastern  Railroad 
Co.,31  the  promoters  of  the  defendant  corporation  had  before  its 
organization  made  a  contract  with  one  Hungerford  that  he  should 
procure  for  the  proposed  company  certain  rights  of  way  and  be 
paid  for  his  services  in  the  shares  of  the  company.  The  company 
upon  its  organization  assumed  the  obligations  of  this  contract, 
but,  being  unable  to  obtain  the  necessary  authority  to  build  a 
bridge  across  the  Housatonic  River,  abandoned  the  enterprise  and 
called  in  the  stock  that  had  been  issued.  The  court  below,  on  the 
theory  that  the  stock  which  he  was  to  receive  for  his  services  never 
had  any  market  value,  allowed  Hungerford  only  nominal  damages. 
The  Supreme  Court  of  Errors,  however,  held  that  the  reason  that 
this  stock  never  had  any  market  value  was  that  the  corporation  had 
decided  not  to  issue  it,  that  it  could  not  take  advantage  of  its 
own  wrong  and  that  Hungerford  was  entitled  to  substantial 
damages. 

Where  no  market  value  of  the  shares  is  established  the  plaintiff's 
recovery  is  measured  by  the  intrinsic  value  of  the  shares.  He 
cannot  recover  their  par  value.32  He  must  prove  the  value  of  the 
contemplated  properties  and  assets  of  the  projected  corporation, 
the  amount  of  the  bonded  and  other  indebtednesses  to  which 
the  shares  were  to  be  subject,  the  amount  and  different  classes  of 
shares  to  be  issued,  and  from  these  facts  the  jury  must  determine 

31.  59  Conn.  272,  22  Atl.  300,  21      529,  52  S.  W.  129;   Kirschmann  v. 
Am.  St.  Rep.  110.  Lediard,  61  Barb.  (N.  Y.)  573;  Pitt 

32.  Beaty   v.    Johnston,    66   Ark.      v.  Kellogg,  33  N.  Y.  St.  R.  894,  11 

Supp.  526. 


68 


THE  LAW  OF  PROMOTERS. 


to  the  best  of  their  ability  the  probable  value  of  the  shares  had 
they  been  issued  in  accordance  with  the  agreement.33  It  would 
ordinarily  be  impossible,  and  the  plaintiff  is  not  called  upon, 
to  prove  such  value  to  any  degree  of  certainty,  but  he  must,  in 
order  to  recover,  adduce  facts  from  which  some  fair  estimate  of 
the  intrinsic  value  of  the  shares  can  be  made.34  A  recovery  may, 
of  course,  be  defeated  by  proof  that  the  contemplated  scheme  was 
wholly  impracticable,  and  that  the  shares  could  in  no  event  have 
had  any  value.35 

§  44.  Action  to  recover  property  conveyed,  or  value  thereof. 

Parties,  complaining  of  the  breach  of  agreements  to  organize 
a  corporation  to  take  over  their  properties  and  deliver  a  certain 
part  of  its  share  capital  in  payment,  realizing  the  very  obvious 
difficulty  of  proving  what  the  shares  would  have  been  worth  had 
the  corporation  been  organized  in  accordance  with  the  agreement, 
frequently  seek  some  other  remedy,  or,  at  least,  some  other  basis 
of  recovery.  Where  the  plaintiff's  property  has  been  conveyed 
to  the  promoters  it  is  sometimes  sought  to  recover  the  property 
conveyed,  or  to  hold  the  promoters  liable  for  the  value  thereof, 
instead  of  suing  them  for  the  rather  uncertain  value  of  the  shares 
which  they  agreed  to  deliver  to  the  plaintiff. 

In  Manistee  Lumber  Co.  v.  Union  National  Bank,36  the  plaintiff 
had  assigned  its  claim  of  $39,000  against  an  insolvent  corporation, 

33.  Crichfield  v.   Julia,   147   Fed.  to  submit  to  the  jury  the- question 
Rep.  65,  73-74,  77  C.  C.  A.  297,  and  of  the  value  of  the   shares   which 
cases  cited;  Beaty  v.  Johnston,  66  should,    under    the    contract,    have 
Ark.   529,   52    S.   W.   129;   Dyer   v.  been     delivered     to     the     plaintiff, 
Rich,  1  Mete.   (Mass.)   180.  where  the  value  of  such  shares  de- 

34.  Curran    v.    Smith,    149    Fed.  pended  entirely  upon  the  value  of 
Rep.  945,  952-953,  81  C.  C.  A.  537;  certain   mineral    rights,    and    there 
Eisenmayer   v.    Leonardt,   148   Cal.  was  no  evidence  whatever  as  to  the 
596,  84  Pac.  43.  value  of  such  mineral  rights. 

It  was  held  hi  Eisleben  v.  Brooks;         35.  Eisenmayer  v.  Leonardt,  148 
170  Fed.  Rep.  86,  102  C.  C.  A.  380,      Cal.  596,  84  Pac.  43. 
that  it  was  error  for  the  trial  court         36.  143  111.  490,  32  N.  E.  449. 


ENFORCEMENT  OF  AGREEMENTS.  69 

to  one  of  the  defendants,  receiving  $11,700  in  cash,  it  being  agreed 
that  the  defendants  should  purchase  the  property  and  assets  of  the 
insolvent  corporation,  transfer  the  same  to  a  new  corporation 
to  be  formed,  and  upon  the  tender  to  it  by  the  plaintiff,  on  or 
before  May  1st,  1889,  of  the  sum  of  $11,700  in  cash,  transfer 
to  the  plaintiff  stock  of  the  new  company  to  the  extent,  and  in 
the  ratio,  that  $11,700  should  bear  to  the  aggregate  cost  of  the 
aforesaid  property  and  assets.  The  defendants  subsequently  de- 
nied their  liability  to  deliver  the  stock  to  the  plaintiff.  The  court 
held  that  the  consideration  for  the  assignment  theretofore  made 
by  the  plaintiff  thereupon  failed,  and  that  a  right  of  action 
arose  to  recover  the  dividend  upon  the  plaintiff's  claim  against  the 
insolvent  corporation  which  the  defendants  had  collected  from 
the  receivers,  less  the  sum  of  $11,700  already  paid  to  the  plaintiff. 

In  Schneider  v.  Miller,37  a  firm  of  which  the  plaintiff  was  the 
surviving  partner,  being  the  holder  of  a  lease  of  certain  asphalt 
lands,  agreed  with  the  defendant  that  the  latter  should  organize  a 
corporation  with  a  capital  stock  of  at  least  $30,000  to  which  this 
lease  should  be  transferred.  The  defendant  agreed  to  contribute 
to  the  corporation,  as  capital,  $10,000  within  sixty  days  and  $20,- 
000  in  six  months.  It  was  agreed  that  the  plaintiff  should  have 
two-thirds  of  the  stock  of  the  corporation,  and  the  defendant's 
firm  one-third  and  certain  specified  royalties  on  the  product 
sold.  The  corporation  was  organized  and  the  lease  assigned  to 
it.  The  defendant  failed  to  contribute  the  capital  required  by 
the  agreement.  The  court  held  that  the  defendant's  promise 
to  advance  the  required  capital  should  be  considerd  a  condition 
subsequent,  and  that  his  failure  to  perform  justified  a  rescission 
of  the  contract  and  entitled  the  plaintiff  to  a  re-assignment  of  the 
lease. 

In  Atlanta  &  West  Point  R.  R.  Co.  v.  Hodnett,38  a  deed  of  a 
right  of  way  given  upon  the  sole  consideration  of  certain  promises 

37.  129  N.  Y.  App.  Div.  197,  113  Y.  App.  Div.  852,  117  Supp.  287. 
Supp.  399.  See  same  v.  same,  132  N.  38.  36  Ga.  669. 


70  THE  LAW  OF  PROMOTERS. 

made  by  its  promoters,  was  set  aside  upon  the  failure  of  the 
corporation  to  perform  such  promises. 

In  Slide  &  Spur  Gold  Mines  v.  Seymour,39  the  plaintiff  was 
allowed  to  enforce  a  vendor's  lien  for  the  unpaid  purchase  price, 
against  property  which  he  had  sold  to  Haldeman,  the  promoter  of 
the  defendant  corporation,  and  which  Haldeman  had  in  turn  sold 
to  the  corporation. 

In  Curran  v.  Smith,40  the  plaintiffs  and  defendants  entered  into 
an  agreement  under  which  the  defendants  agreed  to  construct  a 
pipe  line  and  reservoir,  and  the  plaintiffs  agreed  to  pay  them 
therefor  $110,000  in  cash  and  one-half  of  the  capital  stock  of  a 
corporation  to  be  formed  to  take  over  the  pipe  line.  The  re- 
mainder of  the  stock  was  to  be  retained  by  the  plaintiffs.  In- 
vestigation having  shown  that  the  cost  of  the  pipe  line  would 
largely  exceed,  and  the  water  supply  fall  short  of,  the  estimates, 
the  defendants  abandoned  the  project.  The  plaintiff's  demand 
for  damages  was  denied  on  the  ground  that  the  value  of  the  shares 
of  the  proposed  corporation  was  too  uncertain.  The  plaintiffs 
were,  however,  allowed  to  recover  from  the  defendants  the  amount 
of  certain  expenditures  in  furtherance  of  the  contract,  made  by 
them  at  the  request  of  the  defendants. 

In  Marston  v.  Singapore  Rattan  Co.,41  the  plaintiff  conveyed 
his  business  to  the  defendant  corporation  under  an  agreement  that 
the  plaintiff  should  be  continued  as  manager,  and  should  receive 
$12,000  in  the  shares  of  the  company.  The  individual  defendants 
agreed  to  take  stock  in  the  corporation  for  the  moneys  owing 
to  them  from  the  plaintiff,  and  one  of  the  defendants  from  time  to 
time  furnished  money  and  merchandise  to  the  corporation,  accept- 
ing shares  in  payment.  The  plaintiff  was,  after  some  eight  months, 
discharged  from  his  position  as  manager.  He  brought  suit 

39.  153  U.  S.  509,  38  L.  Ed.  802,  41.  163  Mass.  296,  39  N.  E.  1113. 
14  Sup.  Ct.  842.  See    Rogers    v.    Garland,    19    Dist. 

40.  149   Fed.   Rep.  945,   81   C.  C.  Col.  24,  41. 
A.  537. 


ENFORCEMENT  OF  AGREEMENTS.  71 

against  both  the  corporation  and  the  individual  defendants,  and 
recovered  the  value  of  the  property  which  he  had  transferred  to 
the  corporation.  The  Supreme  Court  reversed  the  judgment  of 
the  trial  court,  holding  that  the  plaintiff  had  for  eight  months  had 
the  benefit  of  the  agreement,  that  the  parties  could  not  be  restored 
to  their  original  position,  and  that  the  plaintiff  could  not  rescind 
the  transaction  and  recover  the  value  of  the  property  conveyed, 
but  could  only  recover  the  damages  resulting  from  the  breach 
of  the  agreement. 

§  45.  Actions  to  enforce  mechanics'  liens. 

An  interesting  question  arises  out  of  the  scheme  under  which 
butter  and  cheese  manufacturing  companies  are  frequently  organ- 
ized, and  the  attempt  of  the  promoting  contractors  to  secure  their 
payments  by  means  of  an  action  to  enforce  a  mechanic's  lien. 
The  scheme  is,  that  the  company  engaged  in  the  business  of  erect- 
ing such  factories,  prepares  a  contract  in  the  form  of  a  sub- 
scription agreement  under  which  it  agrees  to  erect  a  factory  at  a 
stated  cost.  The  subscribers  each  sign  for  a  stated  amount 
and  agree  to  form  a  corporation  to  take  over  the  factory  and 
to  issue  its  shares  to  themselves  in  proportion  to  the  amount  of 
their  respective  subscriptions.  The  agreement  sometimes  con- 
tains a  clause  to  the  effect  that  the  subscribers  are  liable  each  for 
himself  alone,  and  not  for  the  others,  and  this  would,  without 
such  clause,  be  the  proper  interpretation  of  the  agreement.42  It 
has  sometimes  happened  that  the  contracting  promoters,  finding 
themselves  unable  to  collect  all  of  the  subscriptions,  have  at- 
tempted by  enforcing  a  mechanic's  lien  against  the  property 

42.  Davis  &  Rankin,  etc.,  Co.  v.  v.  Graham,  78  Fed.  Rep.  83,  23  C. 
Barber,  51  Fed.  Rep.  148;  Davis  &  C.  A.  657,  41  U.  S.  App.  680;  Davis 
Rankin,  etc.,  Co.  v.  Jones,  66  Fed.  &  Rankin  v.  Creamery  Assoc.,  63 
Rep.  124,  14  C.  C.  A.  30,  32  U.  S.  Mo.  App.  477,  480  and  cases*  cited. 
App.  32 ;  Chicago  Bldg.  &  M'f 'g  Co.  Cf .  Davis  v.  Shaf er,  50  Fed.  Rep. 

764. 


72  THE  LAW  OF  PROMOTERS. 

to  secure  the  unpaid  portion  of  the  contract  price.  The  en- 
forcement of  such  lien  would,  in  effect,  compel  those  subscribers 
who  had  paid  their  subscriptions,  to  pay  the  subscriptions  of  the 
delinquent  subscribers  in  order  to  avoid  the  loss  of  the  entire 
property.  The  right  to  enforce  a  mechanic's  lien  should  in  such 
«ase  be  denied,43  but  it  has  in  at  least  one  case  been  allowed.44 

43.  Burnap    v.     Sylvania    Butter  44.  Davis  &  Rankin,  etc.,  Co.  v. 

Co.,   12   Ohio   C.   C.   639;   Davis   &  Colusa    Dairy  Assoc.,    55   111.   App. 

Rankin  v.  Creamery  Assoc.,  63  Mo.  591. 

App.  477.  • 


CHAPTER  IV. 

OF  CONTRACTS  MADE  FOR  THE  CORPORATION  BY  ITS  PROMOTERS. 

Section  46.  Power  of  promoter  to  make  contract  for  corporation. 

47.  Power  of  promoter  to  make  contract  for  corporation  after 
granting  of  charter. 

48.  Power  of  promoter  to  make  contract  for  corporation  after 
complete  organization. 

49.  Liability  imposed  upon  corporation  by  act  of  incorporation, 
or  articles  of  association. 

50.  Assumption  of  liability  by  the  fully  organized  corporation. 

51.  Status  of  promoter's  contract  pending  action   of  corporation. 

52.  Status   of    subscription    agreements   pending   action    of   cor- 
poration. 

53.  Assumption  of  liability  by  agreement  of  corporation. 

54.  The  act  of  assumption. 

55.  Necessity  of  consideration. 

56.  Liability  of  corporation  resulting  from  acceptance  of  benefit 
of  promoter's  contract. 

57.  Enforcement  at  law  or  in  equity. 

58.  Lord  Cottenham's  Rule. 

59.  Obligation  of  corporation  to  pay  for  services  in  procuring 
contracts  accepted  by  it. 

60.  Materiality  of  circumstance  that  original  contract  made  by  less 
than  majority  of  incorporators. 

61.  Acceptance  must  be  with  full  knowledge. 

62.  Liability    of   corporation   accepting   benefit   of   contract   not 
contemplating  performance  by  it. 

63.  The  same  subject. — Contracts  of  a  continuing  nature. 

64.  The  same  subject. — Amended  contracts. 

65.  The  same  subject. — Express  adoption. 

66.  The   same  subject. — Obligations  cast  upon  assignee  by  terms 
of  contract. 

67.  The  same  subject.    Where  corporation  is  organized  to  escape 
existing  obligations. 

(73) 


74  THE  LAW  OF  PROMOTERS. 

SECTION   68.  Liability  of  the  corporation  as  affected  by  nature  of  par- 
ticular agreement 

69.  Varying  written  agreement  of  promoter. 

70.  Subscription   agreements. 

71.  Notice  to  promoter  as  notice  to  the  corporation. 

72.  Admissions  of  promoter. 

73.  Enforcement  by  corporation  of  contract  made  by  promoter. 

74.  Right   of  corporation   to   conveyance   of   property   purchased 
for  it  by  promoter. 

75.  Effect     of     instrument     naming     projected     corporation     as- 
grantee. 

76.  Title  to   property   which  corporation  is   expressly   organized 
to  acquire. 

77.  Liability  of  promoter  on  contract  made  for  corporation. 

78.  Liability  of  promoter  after  obligations  are  assumed  by  cor- 
poration. 

79.  Enforcement  of  contract  by  promoter. 

80.  Pleading  the  promoter's  contract. 

§  46.  Power  of  promoter  to  make  contract  for  corporation. 

The  law  is  well  settled  that  contracts  made  for  a  projected  cor- 
poration by  its  promoters,  are  not  binding  upon  it,1  and  this  has 
been  held  to  be  so  even  though  the  promoters,  after  the  organiza- 

1.  Fed eral.— Winters  v.  Hub  Min-  Co.   v.   Platt,  5  Colo.   App.  515,   39 

ing  Co.,  57  Fed.  Rep.  287;  Weiss  v.  Pac.  584;   Colorado  Land  &  Water 

Arnold  Print  Works,  188  Fed.  Rep.  Co.  v.  Adams,  5  Colo.  App.  190,  201, 

688.     In  re   Ballou,  215  Fed.  Rep.  37  Pac.  39,  42-43;  Miser  Gold  Min- 

810,  812.  ing  &  Milling  Co.  v.  Moody,  37  Colo. 

Alabama. — Moore       &       Handley  310,  86  Pac.  335. 

Hardware  Co.  v.  Towers  Hardware  Florida. — Sumner-May    Hardware 

Co.,  87  Ala.  206,  6  So.  41,  13  Am.  Co.  v.  Scally,  66  Fla.  93,  62  So.  900. 

St.  R.  23.  Illinois. — Park   v.   Modern  Wood- 

California— Morrison      v.       Gold  men  of  Am.,   181   111.   214,  234,  54 

Mountain  Gold  Mining  Co.,  52  Cal.  N.  E.  932. 

306;    Hawkins    v.    Mansfield    Gold  Indiana. — Cushion  Heel  Shoe  Co. 

Mining   Co.,   52   Cal.   513;   Peek   v.  v.   Hartt,   181   Ind.   167,  103  N.   E. 

Steinberg,    163   Cal.    127,    124   Pac.  1063,  50  L.  R.  A.  N.  S.  979. 

834.  Iowa. — Stevenson   v.   Dubuque   L. 

Colorado. — Arapahoe     Investment  &  L.  Min.  Co.,  34  Iowa  577;  Carey 


PROMOTERS'  CONTRACTS. 


75 


tion  of  the  company,  constitute  all  its  stockholders,  officers  and 


v.  Des  Moines  Co-op.  Coal  &  Min. 
Co.,  81  Iowa  674,  47  N.  W.  882. 

Louisiana. — Bradshaw  v.  Knoll, 
132  La.  829,  61  So.  839;  Shreveport 
Nat'l  Bank  v.  Maples,  119  La.  41, 
43  So.  905. 

Massachusetts. — Holyoke  Envel- 
ope Co.  v.  U.  S.  Envelope  Co.,  182 
Mass.  171,  65  N.  E.  54 ;  Penn.  Match 
Co.  v.  Hapgood,  141  Mass.  145,  7 
N.  E.  22;  Abbott  v.  Hapgood,  150 
Mass.  248,  22  N.  E.  907,  5  L.  R.  A. 
586,  15  Am.  St.  Rep.  193;  Bradford 
v.  Metcalf,  185  Mass.  205,  70  N.  E. 
40. 

Michigan. — Sullivan  v.  Detroit  Y. 
&  A.  A.  Ry.  Co.,  135  Mich.  661,  98 
N.  W.  756,  64  L.  R.  A.  673,  106  Am. 
St.  R.  403;  Carmody  v.  Powers,  60 
Mich.  26,  26  N.  W.  801,  13  Am.  & 
Eng.  Corp.  Cas.  4. 

Minnesota — Battelle  v.  North- 
western Cement  &  Concrete  Pave- 
ment Co.,  37  Minn.  89,  33  N.  W. 
327;  Bond  v.  Pike,  101  Minn.  127 
111  N.  W.  916;  Church  v.  Church 
Cementico  Co.,  75  Minn.  85,  77  N. 
W.  548. 

Mississippi. — Bank  of  Forest  v. 
Orgill  Bros.  &  Co.,  82  Miss.  81;  34 
So.  325. 

Missouri. — Davis  v.  Maysville 
Creamery  Ass'n,  63  Mo.  App.  477; 
State  v.  People's  TJ.  S.  Bank,  197 
Mo..  574,  591,  94  S.  W.  953,  957; 
Van  Noy  v.  Central  Union  Fire  Ins. 
Co.,  168  Mo.  App.  287,  153  S.  W. 
1090. 

New  Jersey. — Seacoast  R.  R.  Co. 
v.  Wood,  65  N.  J.  Eq.  530,  537,  56 
Atl.  337,  affirmed  (««&  nom.  At- 
lantic City  R.  R.  Co.  v.  Wood),  78 


N.  J.  Eq.  298,  81  Atl.  1132;  Hudson 
Milling  Co.  v.  Higgins,  85  N.  J. 
Law  268,  88  Atl.  1079. 

New  York. — Munson  v.  Syracuse 
G.  &  C.  R.  R.  Co.,  103  N.  Y.  58,  75- 
76,  8  N.  E.  355,  29  Am.  &  Eng.  R. 
R.  Cas.  377  (citing  1  Redfield  on 
Railways  9)  ;  Rogers  v.  N.  Y.  & 
Texas  Land  Co.,  134  N.  Y.  197,  210- 
211,  32  N.  E.  27,  48  St.  Rep.  263; 
Bond  v.  Atlantic  Terra  Gotta  Co., 
137  App.  Div.  671,  677,  122  Supp. 
425,  followed,  151  App.  Div.  938,  135 
Supp.  1101,  affirmed,  210  N.  Y.  587, 
104  N.  E.  1127;  Berridge  v.  Ab- 
ernethy,  24  Weekly  Dig.  513; 
Metzger  v.  Knox,  77  Misc.  271,  136 
Supp.  681,  aff'd,  153  App.  Div.  911, 
137  Supp.  1129;  Matter  of  Roches- 
ter H.  &  L.  R.  R.  Co.,  50  Hun  29, 
18  St.  R.  654,  2  Supp.  457. 

Cf.  McDermott  v.  Harrison,  56 
Hun  640,  9  Supp.  184,  30  St.  R.  324, 
where  Cullen,  J.  expresses  a  doubt 
that  the  rule  that  the  promot- 
ers cannot  bind  the  corporation  ap- 
plies to  a  mere  trading  corporation. 

Ohio. — Dayton,  etc.,  Turnpike  Co. 
v.  Coy,  13  Ohio  St.  84. 

Tennessee. — Pittsburg  &  Tennes- 
see Copper  Co.  v.  Quintrell,  91 
Tenn.  693,  20  S.  W.  248. 

Texas. — Weathersby  v.  Texas  & 
Ohio  Lumber  Co.,  —  Tex.  Civ.  App. 
— ,  146  S.  W.  243;  Am.  Home  Life 
Ins.  Co.  v.  Jenkins,  —  Tex.  Civ. 
App.  — ,  138  S.  W.  424;  Weather- 
ford  M.  W.  &  N.  W.  Ry.  Co.  v. 
Granger,  86  Tex.  350,  24  S.  W.  795, 
40  Am.  St.  R.  837;  Exline-Reimers 
Co.  v.  Lone  Star  Life  Ins.  Co.,  — 
Tex.  Civ.  App.  — ,  171  S.  W.  1060. 


76  THE  LAW  OF  PROMOTERS. 

directors.2     A  corporation  cannot,  before  it  has  achieved  legal 


Utah. — Wall  v.  Niagara  Min.  & 
Sm.  Co.,  20  Utah  474,  59  Pac.  399; 
Long  v.  Citizens  Bank,  8  Utah  104, 
29  Pac.  878;  Utah  Optical  Co.  v. 
Keith,  18  Utah  464,  56  Pac.  155; 
Tanner  v.  Sinaloa  Land  &  Fruit 
Co.,  43  Utah  14,  134  Pac.  586. 

Washington. — Chilcott  v.  Wash- 
ington State  Colonization  Co.,  45 
Wash.  148,  88  Pac.  113. 

West  Virginia. — Richardson  v. 
Graham,  45  W.  Va.  134,  30  S.  E.  92. 

Wisconsin. — Pratt  v.  Oshkosh 
Match  Co.,  89  Wis.  406,  62  N.  W. 
84;  Bufflngton  v.  Bardon,  80  Wis. 
635,  50  N.  W.  776. 

United  Kingdom  and  Colonies. — 
Caledonian  &  Dumbartonshire  Junc- 
tion Ry.  Co.  v.  The  Magistrates  of 
Helensburgh,  2  Macq.  391,  2  Jur.  N. 
S.  695;  Preston  v.  Proprietors  of 
Liverpool,  Manchester,  etc.,  Ry.,  5 
H.  L.  Gas.  605;  Touche  v.  Metro- 
politan Ry.  Warehousing  Co.,  L.  R. 
6  Ch.  App.  671 ;  In  re  Empress  En- 
gineering Co.,  L.  R.  16  Ch.  Div. 
125;  Gooday  v.  Colchester  &  Stour 
Valley  Ry.  Co.,  15  Eng.  Law  &  Eq. 
596,  17  Beav.  132;  In  re  Hereford 
&  South  Wales,  Waggon  &  En- 
gineering Co.,  L.  R.  2  Ch.  Div. 
621,  35  L.  T.  N.  S.  40;  Coit  v. 
Dowling,  4  N.  W.  Terr.  464. 

See  cases  cited  in  note  to  Oakes 
v.  Cattaraugus  Water  Co.,  26  L. 
R.  A.  544 ;  and  note  to  Cush- 
ion Heel  Shoe  Co.  v.  Hartt,  50  L. 
R.  A.  N.  S.  980. 

But  see  Chicago  Bldg.  &  Mfg.  Co. 
v.  Talbottom,  etc.,  Co.,  106  Ga.  84, 
31  S.  E.  809. 

The  negotiations  of  the  promoter 


may,  however,  be  admitted  in  evi- 
dence to  aid  in  determining  the  un- 
derstanding afterwards  arrived  at 
between  the  corporation  and  the 
other  contracting  party.  First  Nat'l 
Bank  v.  Armstrong,  42  Fed.  Rep. 
193,  195. 

The  promoters'  contracts  may  be 
made  binding  upon  the  corporation 
by  statute.  See  Railways  Con- 
struction Facilities  Act  (Stat.  27  & 
28  Viet.  Ch.  121),  §  30,  of  which  pro- 
vides that  "Contracts  relative  to 
the  purchase  or  taking  of  lands  for 
the  railway,  entered  into  by  the 
promoters  before  the  incorporation 
of  the  company  by  the  certificate, 
shall  be  as  binding  on  the  company 
as  if  they  had  been  entered  into  by 
the  company." 

2.  Battelle  v.  Northwestern  Ce- 
ment &  Concrete  Pavement  Co.,  37 
Minn.  89,  33  N.  W.  327,  and  see 
Weatherford  M.  W.  &  N.  W.  R.  R. 
Co.  v.  Granger,  86  Tex.  350,  357,  24 
S.  W.  795,  798,  40  Am.  St.  Rep. 
837. 

Contra  Pearsall  v.  Tenn.  Central 
Ry.  Co.,  2  Tenn.  Ch.  App.  682,  709- 
710;  Ruttle  v.  What  Cheer  Coal 
Min.  Co.,  153  Mich.  300,  117  N.  W. 
168. 

Cf.  Paxton  v.  Bacon  Mill  &  Min- 
ing Co.,  2  Nev.  257,  260,  and  see 
post,  §§  67,  71. 

The  corporation  may,  in  some 
cases,  be  estopped  by  the  acts  of 
the  persons  who  afterwards  create 
It,  own  all  its  capital  stock,  and 
constitute  its  directors  and  officers. 
Force  v.  Sawyer-Boss  M'f'g  Co.,  Ill 
Fed.  Rep.  902,  affirmed,  113  Fed. 


PROMOTERS'  CONTRACTS. 


77 


existence,  have  agents  or  enter  upon  contractual  relations.  One 
might,  says  the  Supreme  Court  of  Illinois,3  as  well  say  that  a  child 
in  venire  sa  mere  may  enter  into  a  contract,  or  that  its  parents 
may  bind  it  by  contract,  as  that  a  corporation  may  enter  into  any 
contract,  or  transact  any  business,  before  it  has  a  full  and  com- 
plete organization  and  existence  as  an  entity. 

§  47.  Power  of  promoter  to  make  contract  for  corporation  after 

granting  of  charter. 

When  a  charter  has  been  granted  the  corporation  has  in  a  sense 
achieved  legal  existence.  The  promoters  are,  however,  not  the 
agents  of  the  corporation  and  cannot  contract  for,  or  otherwise 
represent  it,  and  the  company  is  not  bound  by  the  engagements 
made  by  them  on  its  behalf  pending  complete  organization.4  The 


Rep.  1018,  51  C.  C.  A.  592 ;  National 
Conduit  M'f'g  Co.  v.  Connecticut 
Pipe  M'f'g  Co.,  73  Fed.  Rep.  491; 
Macey  Co.  v.  Globe  Wernicke  Co., 
180  Fed.  Rep.  401,  103  C.  C.  A.  547. 
See  post,  §§71  and  67. 

3.  Gent  v.  Manufacturers  &  Mer- 
chants Ins.  Co.,  107  111.  652,  658,  6 
Am.  &  Eng.  Corp.  Gas.  588. 

4.  Illinois. — Gent  v.   Manufactur- 
ers &  Merchants   Ins.  Co.,   107  111. 
652,  658,  6  Am.  &  Eng.  Corp.  Gas. 
588;     Western     Screw     &     Manu- 
facturing   Co.    v.    Cousley,    72    111. 
531. 

Kansas. — Whetstone  v.  Crane 
Bros.  M'f'g  Co.,  1  Kan.  App.  320,  41 
Pac.  211. 

Maryland. — Franklin  Fire  Ins. 
Co.  v.  Hart,  31  Md.  59. 

Oregon. — McVicker  v.  Cone,  21 
Or.  353,  28  Pac.  76. 

Rhode  Island. — Ireland  v.  Globe 
Milling  &  Reduction  Co.,  20  R.  I. 
190,  38  Atl.  116,  38  L.  R.  A.  299. 


United  Kingdom  and  Colonies. — 
Gunn  v.  London  &  Lancashire  Fire 
Ins.  Co.,  12  Com.  Bench  N.  S.  694; 
Payne  v.  New  South  Wales,  etc., 
Co.,  10  Exch.  283,  and  see  Hutch- 
ison v.  Surrey  Consumers,  etc., 
Ass'n,  11  C.  B.  689. 

Nor  have  the  Incorporators  power 
to  contract  for  the  corporation 
pending  its  complete  organization. 
(Moore  &  Handley  Hardware  Co.  v. 
Towers  Hardware  Co.,  87  Ala.  206, 
6  So.  41,  13  Am.  St.  Rep.  23 ;  Blood 
v.  La  Serena  L.  &  W.  Co.,  113  Gal. 
221,  45  Pac.  252;  Safety  Deposit 
Life  Ins.  Co.  v.  Smith,  65  111.  309; 
Stowe  v.  Flagg.  72  111.  397;  Mont- 
gomery v.  Whitbeck,  12  N.  D.  385, 
96  N.  W.  327;  Coyote  G.  &  S.  M. 
Co.  v.  Ruble,  8  Or.  284,  291-292; 
McVicker  v.  Cone,  21  Or.  353,  28 
Pac.  76;  Ireland  v.  Globe  Milling  & 
Reduction  Co.,  20  R.  I.  190,  38  Atl. 
116,  38  L.  R.  A.  299.  Cf.  Harrison 
v.  Vermont  Manganese  Co.,  1  N.  Y. 


78 


THE  LAW  OF  PROMOTERS. 


corporation  may  be  bound  by  the  contract  of  the  promoters,  made 
after  the  granting  of  its  charter,  if  a  provision  to  that  effect  is 
contained  in  the  corporate  charter,  or  in  the  statute  under  which 
the  company  is  organized.5  Power  to  contract  for  the  company 
pending  its  complete  organization  would,  if  granted  by  charter  or 
statute,  generally  be  conferred  upon  the  incorporators,6  or  upon 
the  directors  named  in  the  charter,7  or  upon  some  person  or  per- 
sons occupying  toward  the  corporation  some  more  definite  relation 
than  that  of  promoter.  . 

§  47.  Power  of  promoter  to  make  contract  for  corporation  after 

complete  organization. 
After  a  corporation  has  been  fully  organized,  its  management 


Misc.  402,  49  St.  Rep.  873,  20  Supp. 
894 ) ,  except  perhaps  as  to  acts  nec- 
essary to  be  performed  to  perfect 
the  corporate  organization.  Low  v. 
Conn.  &  Pass.  Rivers  R.  R.,  45  N. 
H.  370,  377;  Hall  v.  Vermont  & 
Mass.  R.  R.  Co.,  28  Vt.  401,  407  and 
see  post,  §  84,  note  14. 

The  incorporators'  contract  would, 
to  bind  the  corporation,  have  to  be 
sanctioned  by  a  majority  of  them. 
Clarke  v.  Omaha  &  Southwestern 
R.  R.  Co.,  5  Neb.  314,  328;  Low  v. 
Conn.  &  Passumpsic  Rivers  R.  R., 
45  N.  H.  370,  379;  Bell's  Gap  Rail- 
road Co.  v.  Christy,  79  Pa.  54,  59, 
21  Am.  Rep.  39;  Tift  v.  Quaker 
City  National  Bank,  141  Pa.  550,  21 
Atl.  660,  30  Am.  &  Eng.  Corp.  Gas. 
339;  Tanner  v.  Sinaloa  Land  & 
Fruit  Co.,  43  Utah  14,  134  Pac. 
586. 

5.  See  Joint  Stock  Companies 
Act  of  1844  (Stat.  7  &  8  Viet.  Chap. 
110),  §  23;  Bull  v.  Chapman,  8 
Exch.  444;  Taylor  v.  Crowland  Gas 
&  Coke  Co.,  23  L.  J.  Exch.  N.  S. 


254,  10  Exch.  293 ;  In  re  State 
Fire  Ins.  Co.,  36  L.  J.  Ch.  N.  S.  634, 
and  see  Hill  v.  Gould,  129  Mo.  106, 
116,  30  S.  W  181,  and  Munson  v. 
Syracuse,  etc.,  R.  R.,  103  N.  Y.  58, 
76,  8  N.  E.  355,  29  Am.  &  Eng.  R.  R. 
Cas.,  377. 

As  to  the  interpretation  of  such 
statutes  see  Gent  v.  Mfrs.  &  Mchts. 
Ins.  Co.,  107  111.  652,  6  Am.  &  Eng. 
Corp  Cas.  588,  and  Montgomery  v. 
Whitbeck,  12  N.  D.  385,  96  N.  W. 
327. 

6.  White  v.  Kahn,  103  Ala.  308, 
15   So.  595;   Gent  v.  Mfrs.  &  Mer- 
chants Ins.  Co.,  107  111.  652;  Mont- 
gomery v.  Whitbeck,  12  N.  D.  385, 
96    N.    W.    327;    Ireland    v.    Globe 
Milling  &  Reduction  Co.,   20  R.  I. 
190,  38  Atl.   116,  38  L.  R.  A.  299; 
Badger  Paper  Co.  v.  Rose,  95  Wis. 
145,  70  N.  W.  302,  37  L.  R.  A.  162. 

7.  Allman   v.   H.   R.   &    E.   R.   R. 
Co.,  85  111.  521,  7  Rep.  236;  Selkirk 
v.  Windsor,  etc.,  R.  R.  W.  Co.,  20 
Ont.     L.     R.     290,     15     Ont.     W. 
R.   87. 


PROMOTERS'  CONTRACTS.  79 

rests  with  the  directors,  and  the  promoters  have,  as  such,  no 
further  connection  therewith.  It  sometimes  happens  that  the 
promoters  of  a  corporation  are,  after  the  organization  of  the 
company,  authorized  to  represent  it  and  to  make  engagements  on 
its  behalf.8  Whatever  power  may  be  so  granted  to  the  promoters 
rests,  not  upon  their  relation  of  promoters  to  the  corporation, 
but  upon  some  agency  independent  thereof. 

§  49.  Liability  imposed  upon  corporation  by  act  of  incorpora- 
tion, or  by  articles  of  association. 

A  corporation  becomes  liable  for  the  contracts  previously  made 
on  its  behalf  by  the  promoters  if  a  provision  to  that  effect  is 
contained  in  the  special  act  by  which  the  corporation  is  created, 
or  the  general  statute  under  which  it  is  organized.9 

A  provision  contained  in  the  articles  of  association  that  the 
company  shall  assume  responsibility  for  the  contracts  made  by 
its  promoters,  imposes  no  liability  upon  the  corporation.  The 
articles  of  association  constitute,  it  is  held,  a  contract  between 
the  share  holders  inter  se,  and  not  a  contract  between  the  corpora- 
tion and  third  parties,  and  a  provision  in  the  articles  that  the 
corporation  shall  enter  upon  or  carry  into  effect  a  contract  made 
by  its  promoters,  cannot  be  availed  of  by  the  opposite  party  to 
such  contract.10  A  provision  of  the  articles  of  association  that 

8.  Hirschmann    v.    Iron    Range,  Utah. — Wall    v.    Niagara    Mining 
etc.,  R.  R.  Co.,  97  Mich.  384,  56  N.  &    Smelting   Co.,   20   Utah   474,    59 
W.  842.  Pac.  399,  citing  Taylor  on  Private 

9.  California. — Mitchell     v.     Pat-  Corporations,  §  87. 

terson,  120  Cal.  286,  52  Pac.  589.  United  Kingdom  and  Colonies. — 

Maine. — Tuttle  v.  Geo.  H.  Tuttle  Garden  v.  General  Cemetery  Co.,  5 

Co.,  101  Me.  287,  64  Atl.  496,  8  Am.  Bing.  N.  C.  253;  Tilson  v.  Warwick 

&  Eng.  Ann.  Gas.  260.  Gas  Light  Co.,  4  Barn.  &  Cres.  962 ; 

New  Hampshire. — Low  v.  Conn.  &  Scott  v.  Lord  Ebury,  L.  R.  2  C.  P. 

Pass.   Rivers  R.   R.,  45  N.   H.  370,  255,  264,  36  L.  J.  C.  P.  161 ;  In  re 

380.  Brampton  &  Longtown  Ry.  Co.,  L.  R. 

Texas. — Weathersby  v.  Tex.  &  10  Ch.  App.  177;  Hitching  v.  Kil- 

Ohio  Lumber  Co.,  —  Tex.  Civ.  App.  kenny,  etc.,  Ry.,  9  C.  B.  536. 

— ,  146  S.  W.  243.  10.  Weatherford,  etc.,  Ry.  Co.  v. 


80 


THE  LAW  OF  PROMOTERS. 


the  company  shall  assume  the  obligations  incurred  on  its  behalf 
by  its  promoters  may,  however,  constitute  an  authorization  to  the 
board  of  directors  to  assume  responsibility  for  the  agreements 
made  by  the  promoters,  or  to  pay  for  the  benefits  received  there- 
under.11 

§  50.  Assumption  pf  liability  by  the  fully  organized  corporation. 
While  the  promoters  have  no  power  to  represent  or  contract 
for  the  corporation,  the  corporation  may,  after  it  has  been  fully 
organized,  agree  to  be  bound  by  the  terms  of  the  contracts  made 
by  them  on  its  behalf.  It  is  sometimes  said  that  the  corporation 
may,  after  it  has  attained  legal  existence  and  complete  organiza- 
tion, "  ratify  "  the  contracts  made  on  its  behalf  by  the  pro- 
moters.12 This  statement  is  not  strictly  correct.  There  can, 


Granger,  86  Tex.  350,  24  S.  W.  795, 
40  Am.  St.  Rep.  837 ;  In  re  North- 
umberland Ave.  Hotel  Co.,  L.  R.  33 
Ch.  Div.  16;  Melhado  v.  Porto 
Alegre  Ry.  Co.,  L.  R.  9  C.  P.  Gas. 
503;  Browne  v.  La  Trinidad,  L.  R. 
37  Ch.  EUv.  1;  In  re  Hereford,  etc., 
Co.,  L.  R.  2  Ch.  Div.  621;  Eley  v. 
Positive  Government  Security,  etc., 
Co.,  L.  R.  1  Exch.  Div.  20,  88,  34 
L.  T.  N.  S.  190;  In  re  Rotherham 
Alum  &  Chemical  Co.,  L.  R.  25 
Ch.  Div.  103,  50  L.  T.  N.  S.  219 ;  In 
re  Empress  Engineering  Co.,  L.  R. 
16  Ch.  Div.  125;  Gunn  v.  London 
&  Lancashire  Fire  Ins.  Co.,  12  C. 
B.  N.  S.  694;  In  re  Rhodesian 
Properties,  Ltd.,  1901  Weekly  Notes 
130,  but  see  Touche  v.  Metropolitan 
Ry.  Warehousing  Co.,  L.  R.  6  Ch. 
App.  671 ;  In  re  Dale  &  Plant,  Ltd., 
61  L.  T.  N.  S.  206. 

11.  Hawkeye  Gold  Dredging  Co. 
v.  State  Bank  of  Iowa  Falls,  157 
Fed.  Rep.  253  (reversed  but  not  as 


to  this  question,  177  Fed.  Rep.  164, 
100  C.  C.  A.  626)  ;  Melhado  v.  Porto 
Alegre  Ry.  Co.,  L.  R.  9  C.  P.  Cas. 
503 ;  In  re  Blakely  Ordnance  Co.,  L. 
R.  3  Ch.  App.  154 ;  In  re  Hereford, 
etc.  Co.,  L.  R.  2  Ch.  Div.  621 ;  Cros- 
key  v.  Bank  of  Wales,  4  Giff.  314. 
See  post,  §  87n. 

12.  Federal. — Kline  Bros.  &  Co. 
v.  Royal  Ins.  Co.,  192  Fed.  Rep. 
378,  reversed  on  another  ground 
(sub  nom.  Royal  Ins.  Co.  v.  Kline 
Bros.  &  Co.),  198  Fed.  Rep.  468, 
117  C.  C.  A.  228. 

Alabama. — Davis  v.  Montgomery 
F.  &  C.  Co.,  101  Ala.  127,  8  So.  496. 

Arkansas. — Perry  v.  Little  Rock  & 
Fort  Smith  Ry.  Co.,  44  Ark.  383, 
395. 

Connecticut. — Stanton  v.  N.  Y.  & 
Eastern  R.  R.  Co.,  59  Conn.  272, 
285,  22  Atl.  300,  21  Am.  St.  Rep. 
110. 

Indiana. — Bruner  v.  Brown,  139 
Ind.  600,  38  N.  E.  318;  Cushion 


PROMOTERS'  CONTRACTS. 


81 


properly  speaking,  be  no  "  ratification  "  of  a  contract  entered 
into  on  behalf  of  the  corporation  at  a  time  when  it  had  not  at- 
tained legal  existence.  A  ratification  dates  back  to  the  making 
of  the  original  contract  and  necessarily  assumes  a  principal  in 
existence  and  capable  of  contracting  at  that  time.  There 
can  be  no  ratification  of  a  contract  entered  into  at  a  time  when 
it  could  not  have  been  made  binding  upon  the  principal.13  There 


Heel  Shoe  Co.  v.  Hartt,  181  Ind. 
167 ;  103  N.  E.  1063,  50  L.  R.  A.  N. 
S.  979. 

Iowa. — Dubuque  Female  College 
v.  District  Township  of  Dubuque, 
13  Iowa  555. 

Missouri. — State  v.  People's  U.  S. 
Bank,  197  Mo.  574,  591,  94  S.  W. 
953,  957. 

Nevada. — Alexander  v.  Winters, 
23  Nev.  475,  49  Pac.  116,  rehearing 
denied,  24  Nev.  143,  50  Pac.  798. 

New  Hampshire. — Low  v.  Conn. 
&  Passumpsic  Rivers  R.  R.,  45  N. 
H.  370,  378. 

New  York. — Mesinger  v.  Mesinger 
Bicycle  Saddle  Co.,  44  App.  Div.  26, 
60  Supp.  431;  Gordon  v.  House  of 
Childhood,  Inc.,  83  Misc.  74,  77, 
144  Supp.  685. 

Pennsylvania. — Tift  v.  Quaker 
City  National  Bank,  141  Pa.  550,  21 
Atl.  660,  38  Am.  &  Eng.  Corp.  Gas. 
339. 

South  Dakota. — Kaeppler  v.  Red- 
field  Creamery  Co.,  12  S.  D.  483,  81 
N.  W.  907. 

Texas. — Lancaster  G.  &  C.  Co.  v. 
Murray  G.  S.  Co.,  19  Tex.  Civ.  App. 
110,  47  S.  W.  387.  (Writ  of  error 
refused,  93  Tex.  732).  Exline- 
Reimers  Co.  v.  Lone  Star  Life  Ins. 
Co.,  --  Tex.  Civ.  App.  — ,  171  S. 
W.  1060. 


Washington. — Chilcott  v.  Wash- 
ington State  Colonization  Co.,  45- 
Wash.  148,  88  Pac.  113. 

Wisconsin — Pratt  v.  Oshkosk 
Match  Co.,  89  Wis.  406,  62  N.  W.  84. 

United  Kingdom  and  Colonies. — 
Spiller  v.  Paris  Skating  Rink  Co., 
L.  R.  7  Ch.  Div.  368;  Mason  v. 
Harris,  L.  R.  11  Ch.  Div.  97,  103. 

13.  Federal. — Marconi's  Telegraph 
Co.  v.  Cross,  16  Hawaii  390. 

Indiana. — See  Smith  v.  Parker, 
148  Ind.  127,  133,  45  N.  E.  770,  772. 

Kentucky. — Oldham  v.  Mt.  Sterl- 
ing Imp.  Co.,  103  Ky.  529,  45  S.  W. 
779. 

Massachusetts. — Bradford  v.  Met- 
calf,  185  Mass.  205,  207,  70  N.  E. 
40;  Abbott  v.  Hapgood,  150  Mass. 
248,  22  N.  E.  907,  5  L.  R.  A.  586,  15 
Am.  St.  Rep.  193. 

Minnesota. — McArthur  v.  Times 
Printing  Co.,  48  Minn.  319,  51  N.  W. 
216,  31  Am.  St.  Rep.  653. 

Missouri. — Queen  City  Furniture 
Co.  v.  Crawford,  127  Mo.  356,  364- 
365,  30  S.  W.  163,  165-166. 

New  York. — Oakes  v.  Cattaraugus 
Water  Co.  (dissenting  opinion), 
143  N.  Y.  430,  440,  38  N.  E.  461 ;  62 
N.  Y.  St.  Rep.  445,  26  L.  R.  A.  544 ; 
Stainsby  v.  Frazer  Metallic  Boat 
Co.,  3  Daly  98. 

Rhode  Island. — Ireland  v.   Globe. 


82 


THE  LAW  OF  PROMOTERS. 


is  no  doubt  that  a  corporation  can,  by  agreement  express  or  im- 
plied, obligate  itself  to  perform  the  contracts  made  on  its  behalf 
by  its  promoters,  but  it  does  so,  not  by  ratifying  the  previous 
contract,  but  by  entering  upon  a  new  agreement  upon  the  terms 
contained  in  the  contract  which  its  promoters  assumed  to  make 
on  its  behalf.14 

The  distinction  is  generally  one  of  words  rather  than  -of  sub- 
stance, and  frequently  leads  to  unnecessary  confusion.  Occa- 
sionally, however,  the  distinction  affects  matters  of  substance,  as 


Milling  &  Reduction  Co.,  20  R.  I. 
190,  38  Atl.  116,  38  L.  R.  A.  299. 

Texas. — Weatherford  M.  W.  &  N. 
W.  Ry.  Co.  v.  Granger,  86  Tex.  350, 
24  S.  W.  795,  40  Am.  St.  Rep.  837; 
Jones  v.  Smith,  87  S.  W.  210. 

West  Virginia. — Richardson  v. 
Graham,  45  W.  Va.  134,  30  S.  E.  92. 

Wisconsin. — Badger  Paper  Co.  v. 
Rose,  95  Wis.  145,  70  N.  W.  302,  37 
L.  R.  A.  162. 

United  Kingdom  and  Colonies. — 
In  re  Empress  Engineering  Co.,  L.  R. 
16  Ch.  Div.  125,  128,  130;  Mel- 
hado  v.  Porto  Alegre  Ry.  Co.,  L.  R. 
9  C.  P.  Gas.  503,  505,  507 ;  Kelner  v. 
Baxter,  L.  R.  2  C.  P.  174;  In  re 
Northumberland  Ave.  Hotel  Co.,  L. 
R.  33  Ch.  Div.  16,  21-22;  Howard 
v.  Patent  Ivory  Mfg.  Co,  L.  R.  38 
Ch.  Div.  156,  164;  Scott  v.  Lord 
Ebury,  L.  R.  2  C.  P.  255,  36  L.  J.  C. 
P.  N.  S.  161. 

See  Note  to  Oakes  v.  Cattaraugus 
Water  Co.,  26  L.  R.  A.  544,  548. 

Cf.  Stanton  v.  N.  Y.  &  Eastern  R. 
R.  Co.,  59  Conn.  272,  285,  22  Atl. 
300,  21  Am.  St.  Rep.  110;  Schreyer 
v.  Turner  Flouring  Mills  Co.,  29  Or. 
1,  43  Pac.  719. 

14.  Federal. — Marconi's  Telegraph 
Co.  v.  Cross,  16  Hawaii  390. 


Indiana. — Smith  v.  Parker,  148 
Ind.  127,  133,  45  N.  E.  770. 

Kentucky. — Oldham  v.  Mt.  Ster- 
ling Imp.  Co.,  103  Ky.  529,  45  S.  W. 
779. 

Massachusetts. — Koppel  v.  Mass. 
Brick  Co.,  192  Mass.  223,  78  N.  E. 
128 ;  Bradford  v.  Metcalf ,  185  Mass. 
205,  207,  70  N.  E.  40;  Holyoke  En- 
velope Co.  v.  U.  S.  Envelope  Co., 
182  Mass.  171,  65  N.  E.  54 ;  Pennell 
v.  Lothrop,  191  Mass.  357,  77  N.  E. 
842. 

Minnesota. — McArthur  v.  Times 
Printing  Co.,  48  Minn.  319,  51  N.  W. 
216,  31  Am.  St.  Rep.  653;  Wasser  v. 
Western  Land  Securities  Co.,  97 
Minn.  460,  464-465,  107  N.  W.  160, 
161 ;  Battelle  v.  Northwestern  Ce- 
ment &  Concrete  Pavement  Co.,  37 
Minn.  89,  33  N.  W.  327. 

Missouri. — Queen  City  Furniture 
Co.  v.  Crawford,  127  Mo.  356,  364- 
365,  30  S.  W.  163,  165-166;  Richard 
Brown  &  Son  Contr.  Co.  v.  Barn- 
brick  Bros.  Const.  Co.,  150  Mo. 
App.  505,  131  S.  W.  134;  Van  Noy 
v.  Central  Union  Fire  Ins.  Co.,  168 
Mo.  App.  287,  153  S.  W.  1090. 

New  fork. — Oakes  v.  Cattaraugus 
Water  Co.  (dissenting  opinion),  143 
N.  Y.  430,  440,  38  N.  E.  461;  62  N. 


PROMOTERS'  CONTRACTS.  §3 

in  McArthur  v.  Times  Printing  Co.,15  where  a  contract  of  employ- 
ment would,  if  the  promoters'  agreement  had  been  considered 
"  ratified  "  and  the  contract  in  suit  as  entered  into  at  the  date 
of  the  original  agreement,  have  been  a  contract  not  to  be  per- 
formed within  one  year  and  therefore  void  under  the  statute  of 
frauds.  The  court,  however,  held  that  the  agreement  of  the  pro- 
moters was  not  ratified ;  that  the  contract  in  suit  was  made  at  the 
time  that  the  corporatiqn  agreed  to  be  bound  by  the  terms  of  the 
promoters'  contract ;  that  it  was  to  be  performed  within  one  year 
from  that  date,  and  was  therefore  valid  and  enforceable. 

It  seems  to  be  held  in  Re  Dale  &  Plant,  Ltd.,16  that  a  resolution 
of  the  directors  in  terms  "  confirming "  the  agreement  of  the 
promoters,  is  ineffectual  because  such  an  agreement  cannot  be 
"  confirmed,"  and  that  the  resolution  of  the  directors  to  be 
effectual  should  have  provided  that  the  corporation  enter  upon  a 
new  agreement  upon  the  same  terms  as  those  contained  in  the 
agreement  assumed  to  have  been  made  for  it  by  its  promoters. 
This  ruling,  if  intended  by  the  court,  is  altogether  too  technical, 
and  will,  it  is  hoped,  not  be  followed. 

§  51.  Status  of  promoter's  contract  pending  action  of  corpora- 
tion. 

It  has  been  suggested  that  a  contract  made  by  the  promoters 
on  behalf  of  a  corporation  to  be  organized  by  them,  is  to  be  con- 

Y.    St.  Rep.  445,  26  L.   R.   A.   544;  Co.,   L.   R.   33   Ch.    Div.   16,   21-22; 

Thistle  v.   Jones,  45   Misc.   215,   92  Natal  Land  Co.  v.  Pauline  Colliery 

Supp.     113,     reversed     on     another  Synd.,  1904,  App.  Cas.  120;  Howard 

ground,  123  App.  Div.  40,  107  Supp.  v.  Patent  Ivory  Mfg.  Co.,  L.  R.  38 

840.  Ch.     Div.     156,     164.       Cf.    In    re 

Tennessee. — Pittsburg      &     Tenn.  National    Motor    Mail    Coach    Co., 

Copper   Co.    v.   Quintrell,   91   Tenn.  Ltd.,  1908,  2  Ch.  Div.  515,  525.     See 

693,  696,  20  S.  W.  248,  citing  Mora-  the   statement   of  Bowen,   L.   J.   in 

wetz  on  Corporations,  §  547.  Falcke    v.    Scottish    Imp.    Ins.    Co., 

West      Virginia.— Richardson      v.  L.  R.  34  Ch.  Div.  234,  249-250. 

Graham,  45  W.  Va.  134,  30  S.  E.  92.  15.  48  Minn.  319,  51  N.  W.  216, 

Fnited  Kingdom  and   Colonies. —  31  Am.  St.  Rep.  653. 

In    re   Northumberland   Ave.    Hotel  16.  61  L.  T.  N.  S.  206;  cf.  Mun- 


84 


THE  LAW  OF  PROMOTERS. 


sidered  a  continuing  offer  on  the  part  of  the  opposite  party  to 
the  agreement,  which  may,  unless  previously  withdrawn,  be  ac- 
cepted by  the  corporation  after  its  complete  organization.17  The 
status  of  the  promoters'  contract  pending  the  action  of  the  cor- 
poration thereon,  depends  largely  upon  the  terms  of  the  agree- 
ment. The  contract  while  not  binding  upon  the  corporation  is 
ordinarily  enforceable  against  the  promoters  because  of  their 
assuming  to  act  as  agents  for  a  non-existent  principal.18  The 
agreement  also  renders  the  opposite  party  liable  in  damages  to  the 
promoters  if  he,  after  the  organization  of  the  corporation,  re- 
fuses to  contract  with  it.19  The  agreement  of  the  parties  is,  there- 
fore, pending  the  organization  of  the  corporation,  something 
more  than  a  continuing  offer  which  the  party  is  at  liberty  to 
withdraw  before  its  acceptance  by  the  corporation.  If  the  pro- 
moters expressly  stipulate,  as  they  sometimes  do,  that  they  shall 
not  be  personally  liable  upon  their  contract,  there  is  no  considera- 
tion for  the  agreement  to  enter  into  a  contract  with  the  proposed 
corporation,  and  the  so  called  agreement  amounts,  in  the  absence 
of  an  independent  consideration,  to  nothing  more  than  an  offer 
which  may  be  withdrawn  at  any  time  before  acceptance. 


son  v.  Magee,  161  N.  Y.  182,  185,  55 
N.  E.  916,  reargument  denied,  161 
N.  Y.  638,  57  N.  E.  1118;  also  per- 
haps James  Young  &  Sons,  Ltd.,  v. 
Gowans,  10  Scots  Law  Times  85. 

17.  Massachusetts. — Penn  Match 
Co.  v.  Hapgood,  141  Mass.  145,  149, 
7  N.  E.  22 ;  Athol  Music  Hall  Co.  v. 
Carey,  116  Mass.  471. 

Minnesota. — Minneapolis  Thresh- 
ing Machine  Co.  v.  Davis,  40  Minn. 
110,  41  N.  W.  1026,  3  L.  R.  A.  796, 
12  Am.  St.  Rep.  701. 

Texas. — Weatherford  M.  W.  &  N. 
W.  Ry.  Co.  v.  Granger,  86  Tex.  350, 
355,  24  S.  W.  795,  797,  40  Am.  St. 
Rep.  837. 


Utah. — Wall  v.  Niagara  Min.  & 
Sm.  Co.,  20  Utah  474,  59  Pac.  399. 

Wisconsin. — Pratt  v.  Oshkosh 
Match  Co.,  89  Wis.  406,  62  N.  W. 
84,  citing  Morawetz  on  Corpora- 
tions, §  548. 

So  held  of  a  contract  signed  by 
the  opposite  party,  but  not  on  be- 
half of  the  corporation,  in  Lauder  v. 
Peoria  Agricultural  &  Trotting  Soc., 
71  111.  App.  475,  480,  and  in  Omaha 
Loan  &  Trust  Co.  v.  Goodman,  62 
Neb.  197,  86  N.  W.  1082. 

18.  See  post,  §  77. 

19.  See  post,  §  79. 


PROMOTERS'  CONTRACTS.  35 

It  has  also  been  suggested  that  the  agreement  with  the  pro- 
moters is  an  alternative  offer  to  be  accepted  and  carried  out 
either  by  the  promoters,  or  by  the  corporation  after  its  organ- 
ization.20 A  party  entering  into  an  agreement  with  promoters 
assuming  to  act  on  behalf  of  a  proposed  corporation,  while  bound 
to  perform  upon  demand  of  the  corporation,  cannot  be  compelled 
to  yield  performance  to  the  promoters  as  individuals  if  the  cor- 
poration is  not  organized.21  The  agreement  is,  therefore,  not  an 
alternative  offer  which  may  be  carried  out  by  either  the  promoters 
or  the  corporation. 

§  52.  Status  of  subscription  agreements  pending  action  of  cor- 
poration. 

Agreements  to  subscribe  for  the  shares  of  a  company  to  be 
formed  stand  upon  a  basis  somewhat  different  from  other  con- 
tracts made  with  the  promoters.  These  subscription  agreements 
are  not  binding  upon  the  corporation  until  accepted  by  it,22  but 
some  cases  hold  that  the  agreement  is  binding  as  a  contract 
between  the  subscribers,  and  that  none  of  them  can  withdraw  there- 
from unless  with  the  consent  of  all.23  Other  cases  hold  that  the 

20.  Holyoke  Envelope  Co.   v.   U.          Ohio. — Dayton,  etc.,  Turnpike  Co. 
S.  Envelope  Co.,  182  Mass.  171,  65      v.  Coy,  13  Ohio  St.  84. 

N.  E.  54.  Wisconsin. — Badger  Paper  Co.   v. 

21.  See  post,  §  79.  Rose,  95  Wis.  145,  70  N.  W.  302,  37 

22.  Maine. — Starrett   v.  Rockland,  L.  R.  A.  162,  and  cases  cited ;  Franey 
etc.,  Ins.  Co.,  65  Me.  374.  v.  Warner,  96  Wis.  222,  231-232,  71 

Minnesota. — Minneapolis    Thresh-  N.  W.  81,  84. 

ing  Machine  Co.  v.  Davis,  40  Minn.  Reid  on  Corporate  Finance,  §  121. 
110,  41  N.  W.  1026,  3  L.  R.  A.  796,  The  corporation  does  not,  by  re- 
12  Am.  St.  Rep.  701;  Red  Wing  fusing  to  accept  the  plaintiff's  sub- 
Hotel  Co.  v.  Friederich,  26  Minn,  scription,  become  liable  for  the  re- 
112,  1  N.  W.  827.  turn  to  him  of  moneys  paid  by  him 

Missouri. — Joy  v.  Manion,  28  Mo.  to  the  promoter,  but  never  received 

App.  55.  by  the  corporation.    Commonwealth 

New  York. — Yonkers  Gazette  Co.  Bonding    &    Casualty    Ins.    Co.    v. 

v.    Taylor,    30    App.    Div.    334,    51  Thurman,    —    Tex.    Civ.    App.    — , 

Supp.  969,  5  N.  Y.  Ann.  Cas.  384.  176  S.  W.  762. 

23.  Alabama. — Kiiox  v.  Childers- 


86 


THE  LAW  OF  PROMOTERS. 


agreement  is  a  mere  offer  upon  the  part  of  each  individual  sub- 
scriber, and  that  a  subscriber  may  withdraw  at  any  time  before 
the  company  is  organized  and  his  subscription  accepted.24  Still 
other  cases  hold  that  while  the  subscribers  are  at  liberty  to  with- 
draw at  any  time  before  the  corporation  comes  into  existence,  the 
subscription  agreement  becomes  binding  and  irrevocable  as  soon 
as  the  corporation  is  created.25  Some  authorities  hold  that  the 
agreement  never  becomes  enforceable  by  the  corporation  unless 


burg  Land  Co.,  86  Ala.  180,   5   So. 
578. 

Dist.  of  Columbia — Glenn  v. 
Bussy,  16  Dist.  of  Col.  (5  Mackey) 
233. 

Maine. — Kennebec  &  Portland  R. 
R.  Co.  v.  Palmer,  34  Me.  366. 

Minnesota. — Minneapolis  Thresh- 
ing Machine  Co.  v.  Davis,  40  Minn. 
110,  41  N.  W.  1026,  3  L.  R.  A.  796, 
12  Am.  St.  Rep.  701. 

Missouri. — Shelby  C°unty  Ry.  Co. 
v.  Crow,  137  Mo.  App.  461,  119  S. 
W.  435;  Ollesheimer  v.  Thompson 
Mfg.  Co.,  44  Mo.  App.  172,  181; 
DeGiverville  Land  Co.  v.  Thompson, 
190  Mo.  App.  682,  176  S.  W.  409. 

New  York. — Lake  Ontario,  etc., 
R.  R.  Co.  v.  Mason,  16  N.  Y.  451, 
463 ;  Hamilton,  etc.,  Plank  Road  Co. 
v.  Rice,  7  Barb.  157,  165. 

Texas. — Belton  Compress  Co.  v. 
Saunders,  70  Tex.  699,  6  S.  W.  134 ; 
Steely  v.  Texas  Imp.  Co.,  55  Tex. 
Civ.  App.  463,  472,  119  S.  W.  319, 
324,  and  cases  cited ;  Panhandle 
Packing  Co.  v.  Stringfellow,  — 
Tex.  Civ.  App.  — ,  180  S.  W.  145. 

See  note  to  Bryant's  Pond  Steam- 
Mill  Co.  v.  Felt,  33  L.  R.  A.  593. 

24.  Illinois. — Richelieu  Hotel  Co. 
v.  Int.  Mil.  Enc.  Co.,  140  111.  248, 


260,  29  N.  E.  1044,  33,  Am.  St.  Rep. 
234. 

Maine. — Bryant's  Pond  Steam- 
Mill  Co.  v.  Felt,  87  Me.  234,  47  Am. 
St.  Rep.  323,  33  L.  R.  A.  593. 

New  York. — Raegener  v.  Brock- 
way,  58  App.  Div.  166,  68  Supp.  712, 
affirmed,  171  N.  Y.  629,  63  N.  E. 
1121. 

Oklahoma. — See  King  v.  Howeth 
&  Co.,  42  Okla.  178,  140  Pac.  1182. 

Texas. — Patty  v.  Hillsboro  Roller- 
Mill  Co.,  4  Tex.  Civ.  App.  224,  23 
S.  W.  336;  Steely  v.  Texas  Imp. 
Co.,  55  Tex.  Civ.  App.  463,  472,  119 
S.  W.  319,  324. 

Wisconsin. — Franey  v.  Warner, 
96  Wis.  222,  231,  71  N.  W.  81,  84. 

United  Kingdom  and  Colonies. — 
Gourlie  v.  Chandler,  41  Nova 
Scotia  341. 

See  note  to  Bryant's  Pond  Steam- 
Mill  Co.  v.  Felt,  33  L.  R.  A.  593. 

As  to  the  sufficiency  of  the  notice 
of  withdrawal,  see  Hudson  Real  Es- 
tate Co.  v.  Tower,  161  Mass.  10,  36 
N.  E.  680,  42  Am.  St.  Rep.  379. 

25.  California. — San  Joaquin  L. 
&  W.  Co.  v.  Beecher,  101  Cal.  70,  35 
Pac.  349. 

Maine. — Bryant's  Pond  Steam- 
Mill  Co.  v.  Felt,  87  Me.  234,  238,  33 
L.  R.  A.  593,  47  Am.  St.  Rep.  323. 


PROMOTERS'  CONTRACTS.  87 

it  contains,  in  addition  to  the  agreement  to  subscribe  for  shares 


Missouri. — Haskell  v.  Sells,  14 
Mo.  App.  91,  101;  Business  Men's 
Assn.  v.  Williams,  137  Mo.  App. 
575,  584,  119  S.  W.  439. 

Oregon. — Balfour  v.  Baker  City 
Gas  Co.,  27  Or.  300,  41  Pac.  164. 

Pennsylvania. — Jeanette  Bottle 
Works  v.  Schall,  13  Pa.  Super  Ct. 
96. 

West  Virginia. — Windsor  Hotel 
Co.  v.  Schenk,  -  -  W.  Va.  — ,  84 
S.  E.  911. 

Wisconsin. — Rehbein  v.  Rahr,  109 
Wis.  136,  85  N.  W.  315. 

See  note  to  Bryant's  Pond  Steam- 
Mill  Co.  v.  Felt,  33  L.  R.  A.  593. 

The  following  cases  hold  that  a 
subscription  may  be  withdrawn  at 
any  time  before  the  corporation  is 
formed.  Planters'  &  Merchants' 
Ind.  Packet  Co.  v.  Webb,  156  Ala. 
551,  46  So.  977,  16  Am.  &  Eng.  Ann. 
Cas.  529;  Hudson  Real  Estate  Co. 
v.  Tower,  156  Mass.  82,  30  N.  E. 
465,  32  Am.  St.  Rep.  934,  161  Mass. 
10,  36  N.  E.  680,  42  Am.  St.  Rep. 
379 ;  Athol  Music  Hall  Co.  v.  Carey, 
116  Mass.  471;  Plank's  Tavern  Co. 
v.  Burkhard,  87  Mich.  182,  49  N.  W. 
562;  Wright  Bros.  v.  Merchants'  & 
Planters'  Packet  Co.,  104  Miss.  507, 
61  So.  550;  Muncy  Traction  Engine 
Co.  v.  Green,  143  Pa.  269,  13  Atl. 
747;  Auburn  Bolt  Works  v.  Shultz, 
143  Pa.  256,  22  Atl.  904 ;  Cleaves  v. 
Brick  Church  Turnpike  Co.,  1 
Sneed  (Tenn.)  491;  Greenbrier  In- 
dustrial Exposition  v.  Rodes,  37  W. 
Va.  738,  17  S.  E.  305;  Windsor 
Hotel  Co.  v.  Schenk,  —  W.  Va.  — , 
84  S.  E.  911. 

There  is  some  difficulty  in  enforc- 


ing informal  subscription  agree- 
ments where  the  statute  prescribes 
a  formal  method  of  taking  subscrip- 
tions. White  v.  Kahn,  103  Ala.  308, 
15  So.  595 ;  •  Northern  Central 
Michigan  R.  R.  Co.  v.  Eslow,  40 
Mich.  222 ;  Carlisle  v.  Saginaw,  etc., 
R.  R.  Co.,  27  Mich.  315;  Sedalia, 
etc.,  Ry.  Co.  v.  Wilkerson,  83  Mo. 
235 ;  Poughkeepsie,  etc.,  Co.  v. 
Griffin,  24  N.  Y.  150 ;  Troy  &  Boston 
R.  R.  Co.  v.  Tibbits,  18  Barb.  (N. 
Y.)  297;  Charlotte,  etc.,  R.  R.  Co. 
v.  Blakely,  3  Strob.  L.  (S.  C.)  245. 

But  see  Windsor  Hotel  Co.  v. 
Schenk,  —  W.  Va.  — ,  84  S.  E.  911. 

It  is  generally  held  that  a  sub- 
scription to  the  stock  of  a  corpora- 
tion to  be  subsequently  organized, 
cannot  be  enforced  unless  a  cor- 
poration de  jure  is  created. 

Alabama. — Schloss  v.  Mont- 
gomery Trade  Co.,  87  Ala.  411,  0 
So.  360,  13  Am.  St.  Rep.  61. 

Indiana. — Wheeler  v.  Thayer,  121 
Ind.  64,  67,  22  N.  E.  972,  and  cases 
cited;  Burke  v.  Mead,  159  Ind.  252, 
64  N.  E.  880;  Williams  v.  Citizens' 
Enterprise  Co.,  153  Ind.  496,  55  N. 
E.  425;  Williams  v.  Citizens'  Enter- 
prise Co.,  25  Ind.  App.  351,  57  N.  E. 
581,  and  cases  cited. 

Kentucky. — Brooksville  R.  Co.  v. 
Byron,  20  Ky.  Law.  Rep.  1941,  50  S. 
W.  530. 

Massachusetts. — Katama  Land  Co. 
v.  Holley,  129  Mass.  540,  546. 

Michigan. — Swartout  v.  Mich.  Air 
Line  R.  R.  Co.,  24  Mich.  389. 

Minnesota — Hause  v.  Mann- 
heimer,  67  Minn.  194,  69  N.  W.  810. 

Mississippi.— Wright      Bros.       v. 


88 


THE  LAW  OF  PROMOTERS. 


of  the  company  when  formed,  an  agreement  by  one  or  more  of 
the  parties  thereto  that  they  will  organize  the  corporation.26 

An  agreement  to  subscribe  for  shares  would,  if  that  were  the  ap- 
parent intent,  be  construed  as  a  contract  on  the  part  of  the 
promoter,  to  organize  a  corporation  upon  the  stipulated  basis, 
and  sell  certain  shares  to  the  subscribers.  Such  an  agreement 
would  constitute  an  enforceable  contract  between  the  promoter 
and  the  subscribers.27 

§  53.  Assumption  of  liability  by  agreement  of  corporation. 
Whatever  theoretical  questions  there  may  exist  as  to  whether 


Merchants'  &  Planters'  Packet  Co., 
104  Miss.  507,  61  So.  550. 

Missouri. — Clark  v.  Barnes,  58 
Mo.  App.  667. 

Nebraska. — Capps  v.  Hastings 
Prospecting  Co.,  40  Neb.  470,  58 
N.  W.  956,  24  L.  R.  A.  259,  42  Am. 
St.  Rep.  677. 

Neiv  York. — Dorris  v.  Sweeney, 
60  N.  Y.  463. 

West  Virginia. — Greenbrier  In- 
'dustrial  Exposition  v.  Rodes,  37  W. 
Va.  738,  17  S.  E.  305. 

And  see  note  to  Jones  v.  Dodge, 
Jy.  R.  A.  N.  S.  1915  A.  472,  485. 

See  post,  §  224. 

A  promoter  active  in  the  organi- 
zation of  the  corporation,  might 
be  estopped  from  pleading  a  de- 
fective organization.  Phoenix  Ware- 
housing Co.  v.  Badger,  6  Hun  (N. 
T.)  293,  affirmed,  67  N.  Y.  294. 

26.  California  Sugar  Manufactur- 
ing Co.  v.  Schafer,  57  Cal.  396;  Twin 
Creek,  etc.,  Turnpike  Road  Co.  v. 
Lancaster,  79  Ky.  552;  Avon 
Springs  Sanitarium  Co.  v.  Weed, 
189  N.  Y.  557,  82  N.  E.  1123  (re- 


argument  denied,  190  N.  Y.  521,  83  N. 
E.  1122),  reversing,  119  N.  Y.  App. 
Div.  560,  104  Supp.  58;  Yonkers 
Gazette  Co.  v.  Taylor,  30  N.  Y.  App. 
Div.  334,  51  Supp.  969,  5  N.  Y.  Ann. 
Cas.  384;  Sanders  v.  Barnaby,  166 
N.  Y.  App.  Div.  274,  151  Supp.  580; 
Lake  Ontario  Shore  R.  R.  Co.  v. 
Curtiss,  80  N.  Y.  219;  Powers  v. 
Knapp,  71  Hun  (N.  Y.)  371,  55  St. 
R.  23,  25  Supp.  19,  followed,  85  Hun 
38,  66  St  R.  133,  32  Supp.  622, 
affirmed,  158  N.  Y.  733,  53  N.  E. 
1131 ;  Strasburg  R.  R.  Co.  v.  Echter- 
nacht,  21  Pa.  St.  220,  60  Am.  Dec. 
49. 

27.  See  ante,  Chapters  II  and  III. 
See  also  post,  §  77,  et  seq. 

See  also  Feitel  v.  Dreyfous,  117 
La.  756,  42  So.  259,  where  it  is  held 
that  an  application  to  subscribe  for 
shares,  though  made  on  a  blank 
furnished  by  the  promoters,  is  a 
mere  offer  to  subscribe  which  does 
not  ripen  into  a  contract  until  it 
has  been  acted  upon  favorably  by 
the  promoters,  and  notice  of  such 
action  given  to  the  applicant 


PROMOTERS'  CONTRACTS. 


89 


a  corporation  can  "  ratify,"  "  adopt,"  or  "  assume  "  a  contract 
entered  into  by  its  promoters  before  its  organization,  there  can 
be  no  question  that  it  may  by  agreement,  either  express  or  im- 
plied, obtain  the  benefits  of  such  contract  and  bind  itself  to  carry 
out  its  obligations.28  The  agreement  of  the  corporation  that  it 
shall  be  bound  by  the  terms  of  the  promoters'  contract  may  be 


28.  Federal.— Bridgeport  Elec- 
tric &  Ice  Co.  v.  Meader,  72  Fed. 
Rep.  115,  18  C.  C.  A.  451,  30  U.  S. 
App.  580;  In  re  Ballou,  215  Fed. 
Rep.  810. 

Arkansas. — Bloom  v.  Home  Ins. 
Agency,  91  Ark.  367,  375,  121  S.  W. 
293. 

California. — Turner  v.  Fidelity 
Loan  Concern,  2  Cal.  App.  122,  131, 
83  Pac.  62,  66. 

Colorado. — Grand  River  Bridge 
Co.  v.  Rollins,  13  Colo.  4,  21  Pac. 
897. 

Connecticut. — Stanton  v.  N.  Y.  & 
Eastern  R.  R.  Co.,  59  Conn.  272,  285, 

22  Atl.  300,  21  Am.  St.  Rep.  110. 
Illinois. — Reichwald       v.       Com- 
mercial Hotel  Co.,  106  111.  439,  448. 

Iowa. — Dubuque  Female  College 
v.  District  Township  of  Dubuque, 
13  Iowa  555. 

Kansas. — Davis  &  Rankin  v. 
Dexter  Butter  &  Cheese  Co.,  52  Kan. 
693,  35  Pac.  776. 

Michigan. — Kimmerle  v.  Dowa- 
giac  Gas  Co.,  159  Mich.  34,  123  N. 
W.  565. 

Nevada. — Alexander    v.    Winters, 

23  Nev.  475,  49  Pac.  116,  rehearing 
denied,  24  Nev.  143,  50  Pac.  798. 

New  York. — Quee  Drug  Co.  v. 
Plaut,  55  App.  Div.  87,  67  Supp.  10; 
Rochester  Dry  Goods  Co.  v.  Fahy, 


111  App.  Div.  748,  751,  97  Supp. 
1013,  affirmed,  188  N.  Y.  629,  81  N. 
E.  1174. 

Oregon. — Schreyer  v.  Turner 
Flouring  Mills  Co.,  29  Or.  1,  43 
Pac.  719. 

Pennsylvania. — Titus  v.  Cata- 
wissa  R.  R.,  5  Phila.  172. 

South  Dakota. — Chase  V.  Redfield 
Creamery  Co.,  12  S.  D.  529,  81  N.  W. 
951. 

Texas. — Ennis  Cotton  Oil  Co.  v. 
Burks,  39  S.  W.  966;  American 
Home  Life  Ins.  Co.  v.  Compere,  — 
Tex.  Civ.  App.  — ,  159  S.  W.  79, 
80;  Texas  West.  Ry.  Co.  v.  Gentry, 
69  Tex.  625,  8  S.  W.  98. 

Utah. — Wall  v.  Niagara  Min.  & 
Sm.  Co.,  20  Utah  474,  59  Pac.  399; 
Tanner  v.  Sinaloa  Land  &  Fruit  Co., 
43  Utah  14,  134  Pac.  586. 

United  Kingdom,  and  Colonies. — 
Boston  Deep  Sea  Fishing  &  Ice  Co. 
v.  Ansell,  L.  R.  39  Ch.  Div.  339; 
Wilkins  v.  Roebuck,  4  Drew.  281; 
Howard  v.  Patent  Ivory  Mfg.  Co., 
L.  R.  38  Ch.  Div.  156;  Nelles  v. 
Hesselstine,  11  Ont.  W.  R.  10G2. 

See  note  to  Oakes  v.  Cattaraugus 
Water  Co.,  26  L.  R.  A.  544,  548,  et 
seq.,  and  note  to  Cushion  Heel  Shoe 
Co.  v.  Hartt,  50  L.  R.  A.  N.  S.  980, 
et  seq.  And  see  cases  cited,  ante, 
§  50,  note  12. 


90 


THE  LAW  OF  PROMOTERS. 


made  by  any  officer  who  would  have  power  to  make  for  it  a  new- 
contract  of  the  same  character.29 

The  highest  degree  of  fairness  on  the  part  of  the  officers  acting 
for  the  corporation  is  of  course  required,30  and  the  agreement  to 
be  bound  by  the  terms  of  the  promoters'  contract  is  ineffectual 
if  the  officers  or  directors  acting  for  the  company  have  a  personal 
interest  in  the  transaction.31  If,  however,  not  only  the  directors 
and  officers,  but  all  of  the  stockholders  have  full  knowledge  of, 
and  are  parties  to,  the  agreement  by  which  the  corporation  enters 
upon  a  contract  upon  the  terms  stipulated  by  the  promoter,  the 


29.  Iowa. — Teeple  v.  Hawkeye 
Gold  Dredging  Co.,  137  Iowa  206, 
114  N.  W.  906. 

Minnesota. — Bond  v.  Pike,  101 
Minn.  127,  111  N.  W.  916;  Battelle 
v.  Northwestern  Cement  &  Concrete 
Pavement  Co.,  37  Minn.  89,  33  N. 
W.  327;  McArthur  v.  Times  Print- 
ing Co.,  48  Minn.  319,  51  N.  W.  216, 
31  Am.  St.  Rep.  653.' 

New  York. — Burke  v.  Lincoln 
Valentine  Co.,  28  Misc.  202,  58  Supp. 
1077,  1124;  Oakes  v.  Catta-raugus 
Water  Co.,  143  N.  Y.  430,  436-437, 
38  N.  E.  461,  62  St.  Rep.  445,  26  L. 
R.  A.  544 ;  Hoag  v.  Lament,  16  Abb. 
Pr.  N.  S.  91,  aff'd,  60  N.  Y.  96,  16 
Abb.  Pr.  N.  S.  369;  Mesinger  v. 
Mesinger  Bicycle  Saddle  Co.,  44 
App.  Div.  26,  60  Supp.  431. 

Oregon — Schreyer  v.  Turner  Flour- 
ing Mills  Co.,  29  Or.  1,  43  Pac.  719. 

Pennsylvania. — Girard  v.  Case 
Bros.  Cutlery  Co.,  225  Pa.  327,  74 
Atl.  201. 

South  Dakota. — Chase  v.  Redfield 
Creamery  Co.,  12  S.  D.  529,  81  N. 
W.  951. 

Utah. — Wall   v.   Niagara   Min.   & 


Sin.  Co.,  20  Utah  474,  59  Pac.  399.. 

A  mere  agent  of  the  corporation 
has  not  power  to  assume  for  it  the 
debts  of  its  incorporators.  White  v. 
Westport  Cotton  Mfg.  Co.,  18  Mass. 
215,  11  Am.  Dec.  168. 

A  contract  was  held  beyond  the 
power  of  the  president,  in  Weath- 
ersby  v.  Texas  &  Ohio  Lumber  Co., 

—  Tex.    Civ.    App.    — ,    146    S.    W. 
243. 

An  act  of  assumption  by  one 
assuming  without  authority  to  act 
as  an  officer  of  the  corporation  is, 
obviously,  of  no  effect,  Exline  Reim- 
ers  Co.  v.  Lone  Star  Life  Ins.  Co., 

—  Tex.    Civ.    App.   — ,    171    S.    W. 
1060. 

30.  Battelle  v.  Northwestern  Ce- 
ment   &    Concrete    Pavement    Co., 
37  Minn.  89,  33  N.  W.  327;  Church 
v.  Church  Cementico  Co.,  75  Minn. 
85,  77  N.  W.  548. 

31.  Munson  v.   Syracuse  G.  &  C. 
R.  R.  Co.,  103  N.  Y.  58,  76,  8  N.  E. 
355,  29  Am.  &  Eng.  R.  R.  Gas.  377, 
and    see   M'Lellan    v.    Detroit    File 
Works,  56  Mich.  579,  23  N.  W.  321,. 
but  see  note  37,  infra. 


PROMOTERS'  CONTRACTS. 


91 


agreement  is  valid  and  binding  upon  the  corporation  regardless 
of  any  personal  interest  of  the  officers  acting  on  its  behalf.32 

It  has  been  held,  though  the  decisions  are  not  free  from  conflict, 
that  the  promoter  who  made  the  original  contract  is  not,  by  reason 
of  his  relation  to  the  subject-matter,  debarred,  after  he  has  become 
an  officer  of  the  corporation,  from  acting  for  it  in  making  a  new 
agreement  by  which  it  accepts  the  burdens  of  the  contract  which 
he  assumed"  to  make  for  it  as  its  promoter.33  It  has  even  been 
said  that  less  evidence  is  required  to  establish  an  agreement  to  be 
bound  by  the  terms  of  the  promoter's  contract  when  the  officer 
acting  for  the  company  was  himself  the  promoter  who  made  the 
original  agreement,  than  when  such  officer  and  the  promoter  who 
made  the  agreement  are  different  persons.34  It  is  true  that  the 
promoter  who  made  the  original  agreement  has  a  personal  interest 
in  the  acceptance  of  its  terms  by  the  corporation,  as  performance 
by  the  corporation  relieves  him  of  his  personal  obligations  under 


32.  Battelle  v.  Northwestern  Ce- 
ment   &    Concrete    Pavement    Co., 
37  Minn.  89,  33  N.  W.  327. 

33.  Illinois.— McCally      v.      Blue 
Ribbon  Gum  Co.,  173  111.  App.  66. 

New  York. — Mesinger  v.  Mesinger 
Bicycle  Saddle  Co.,  44  App.  Div.  26, 
60  Supp.  431 ;  Oakes  v.  Cattaraugus 
Water  Co.,  143  N.  Y.  430,  38  N.  E. 
461,  62  St.  Rep.  445,  26  L.  R.  A.  544, 
(two  judges  dissenting). 

Pennsylvania. — Girard  v.  Case 
Bros.  Cutlery  Co.,  225  Pa.  327,  74 
Atl.  201. 

South  Dakota. — Chase  v.  Redfield 
Creamery  Co.,  12  S.  D.  529,  81  N. 
W.  951. 

Wisconsin. — Pratt  v.  Oshkosh 
Match  Co.,  89  Wis.  406,  62  N.  W.  84. 

Cf.  Weatherford  M.  W.  &  N.  W. 
Ry.  Co.  v.  Granger,  86  Tex.  350,  358, 
24  S.  W.  795,  798,  40  Am.  St.  Rep. 
837;  Jones  v.  Smith  (Tex.),  87  S. 


W.  210,  212;  William  Allen  &  Co. 
v.  Somerset  Hotel  Co.,  88  N.  Y. 
Supp.  944. 

34.  Hall  v.  Herter  Bros.,  83  Hun 
(N.  Y.)  19,  22,  64  St.  Rep.  378,  31 
Supp.  692,  and  see  same  v.  same,  90 
Hun  280,  35  Supp.  769,  70  St.  R. 
273,  affirmed,  157  N.  Y.  694,  51  N. 
E.  1091 ;  Burke  v.  Lincoln  Valentine 
Co.,  28  N.  Y.  Misc.  202,  58  Supp. 
1077,  1124,  and  see  Pearsall  v.  Tenn. 
Central  Ry.  Co.,  2  Tenn.  Ch.  App. 
682. 

In  McCally  v.  Blue  Ribbon  Gum 
Co.,  173  111.  App.  66,  the  promises 
to  pay  the  plaintiff,  made  by 
the  promoters  after  they  had  become 
officers  of  the  corporation,  might 
well  have  been  interpreted  as  their 
individual  promises.  The  court, 
however,  held  that  an  assumption 
of  the  indebtedness  by  the  corpora- 
tion had  been  sufficiently  proved. 


92  THE  LAW  OF  PROMOTERS. 

the  contract,35  and  it  can  readily  be  argued  that  this  personal 
interest  prevents  him  from  acting  for  the  company  in  the  matter. 
The  rule  that  an  agent  cannot  bind  his  principal  if  personally 
interested  in  the  transaction,  is  not,  however,  in  all  jurisdictions, 
applied  with  strictness  to  the  acts  of  a  promoter  who,  after  he  has 
become  an  officer  of  the  corporation,  causes  it  to  accept  and  carry 
out  the  burden  of  a  contract  which  he  assumed  to  make  on  its 
behalf  in  his  capacity  of  promoter.36 

It  is  suggested  in  Munson  v.  Magee  37  that  the  opposite  party 
to  a  contract  with  the  promoter  is,  if  he  afterwards  becomes  a  di- 
rector of  the  corporation,  not  disqualified  from  voting  on  a  resolu- 
tion that  the  corporation  shall  assume  the  obligations  of  such 
contract.  The  reasoning  of  the  court,  which  is  not  convincing, 
is,  that  if  the  promoter  is  solvent  and  able  to  carry  out  his  con- 
tract the  opposite  party  has  nothing  to  gain  by  the  corporate 
assumption  of  the  promoter's  obligation,  and  that  the  resolution 
of  the  directors  that  the  corporation  shall  enter  into  a  contract 
upon  the  terms  of  the  one  made  by  the  promoter,  does  not  affect 
the  interest  of  the  opposite  party  until  he  sees  fit  to  accept  the 
liability  of  the  corporation  in  place  of  that  of  the  promoter,  and 
that  this  the  resolution  did  not  require  him  to  do. 

§  54.  The  act  of  assumption. 

Whether  the  corporation  has  adopted  the  contract  made  by  the 
promoter,  or,  more  properly  speaking,  entered  upon  a  new  con- 
tract upon  the  terms  of  that  made  by  the  promoter,  is  a  question 
of  fact.38  An  acceptance  by  the  corporation  of  the  terms  of 

35.  See  post,  §§  77-78.  Cf.  Munson  v.   Syracuse  G.  &  C. 

36.  See  cases   cited   under  notes  R.  R.  Co.,  103  N.  Y.  58,  8  N.  E.  355, 
33  and  34.  29  Am.  &  Eng.  R.  R.  Gas.  377 ;  Reid 

37.  161    N.    Y.    182,    194,    55    N.  on  Corporate  Finance,   §   190.     See 
E.  916,  reargument  denied,   161  N.  also  ante,  note  31. 

Y.  638,  57  N.  E.  1118,  and  see  38.  Cheseborough  v.  North  Second 
Rudd  v.  Magee,  51  N.  Y.  App.  Div.  St.,  etc.,  R.  R.  Co.,  5  N.  Y.  Weekly 
624,  65  Supp_  65.  Dig.  393.  (Citing  Van  Schaik  v. 


PROMOTERS'  CONTRACTS. 


93 


the  promoter's  contract  may  of  course  be  shown  by  an  express 
agreement  entered  into  pursuant  to  a  resolution  of  the  board  of 
directors.  A  resolution  of  the  directors  is,  however,  unnecessary,39 
and  the  agreement  to  be  bound  by  the  terms  of  the  promoter's 
contract  is  often  inferred  from  the  acts  or  mere  acquiescence  of 
the  corporation.40  It  has,  however,  been  said  that  an  agreement 
of  the  corporation  to  be  bound  by  the  terms  of  the  promoter's 
contract  should  not  be  too  hastily  inferred.41 


Third  Ave.  R.  R.  Co.,  38  N.  Y.  346)  ; 
Oakes  v.  Cattaraugus  Water  Co., 
143  N.  Y.  430,  437,  438,  38  N.  E.  461, 
62  St.  Rep.  445,  26  L.  R.  A.  544; 
Brautigam  v.  Dean  &  Co.,  85  N.  J. 
Law  549,  89  Atl.  760,  affirmed,  86 
N.  J.  Law  676,  92  Atl.  344 ;  Howard 
v.  Patent  Ivory  Co.,  L.  R.  38  Ch. 
Div.  156,  165. 

See  note  to  Oakes  v.  Cattaraugus 
Water  Co.,  26  L.  R.  A.  544,  551. 

39.  Possell  v.  Smith,  39  Colo.  127, 
88   Pac.    1064;    Bond    v.    Pike,   101 
Minn.  127,  111  N.  W.  916;  Battelle 
v.  Northwestern  Cement  &  Concrete 
Pavement  Co.,  37  Minn.  89,  33  N.  W. 
327;  Hall  v.  Herter  Bros.,  83  Hun 
(N.  Y.)  19,  64  St.  Rep.  378,  31  Supp. 
692 ;    Browning    v.    Great    Central 
Mining  Co.,  5  H.  &  N.  856,  29  L.  J. 
Exch.  399. 

See  also  cases  cited  under  note  40. 

40.  In  re  Quality  Shoe  Shop,  212 
Fed.  Rep.  321 ;  Smith  v.  Parker,  148 
Ind.    127,   45   N.    E.    770;    Luin    v. 
Chicago  Grill  Co.,  138  Iowa  268,  115 
N.  W.  1024;  North  Anson  Lumber 
Co.  v.  Smith,  209  Mass.  333,  95  N.  E. 
838;  Bond  v.  Pike,  101  Minn.  127, 
111  N.  W.  916;  Battelle  v.  N.  W. 
Cement     and     Concrete     Pavement 
Co.,  37  Minn.  89,  33  N.  W.  327 ;  Mc- 


Arthur  v.  Times  Printing  Co.,  48 
Minn.  319,  51  N.  W.  216,  31  Am.  St. 
Rep.  653 ;  Schreyer  v.  Turner  Flour- 
ing Mills  Co.,  29  Or.  1,  43  Pac.  719 ; 
Chase  v.  Redfleld  Creamery  Co.,  12 
S.  D.  529,  81  N.  W.  951;  Huron 
Printing  &  Bindery  Co.  v.  Kittleson, 
4  S.  D.  520,  57  N.  W.  233;  Wall  v. 
Niagara  Mining  &  Smelting  Co.,  20 
Utah  474,  59  Pac.  399. 

See  note  to  Cushion  Heel  Shoe  Co. 
v.  Hartt,  50  L.  R.  A.  N.  S.  983. 

"  Whatever  would  amount  to  a 
ratification  of  the  unauthorized  acts 
of  an  agent  would  be  sufficient  evi- 
dence of  an  adoption  of  the  con- 
tracts of  a  promoter."  Arapahoe 
Inv.  Co.  v.  Platt,  5  Colo.  App.  515, 
39  Pac.  584. 

41.  Bagot  Pneumatic  Tyre  Co.  v. 
Clipper  Pneumatic  Tyre  Co.,  1901,  1 
Ch.  Div.  196,  202,  affirmed,  1902,  1 
Ch.  Div.  146. 

The  bare  affirmation  of  the  pro- 
moter that  his  undertaking  was 
"  ratified "  by  the  corporation,  has 
been  held  insufficient  to  take  the 
case  to  the  jury.  The  facts  upon 
which  the  claim  of  "  ratification  "  Is 
made,  must  be  proved.  Rapid  Hook 
&  Eye  Co.  v.  De  Ruyter,  117  Mich. 
547,  76  N.  W.  76. 


94 


THE  LAW  OF  PROMOTERS. 


In  Wood  v.  Whelen,42  corporate  mortgage  bonds  were  issued 
pursuant  to  an  ineffectual  resolution  of  the  promoters  enacted 
before  the  complete  organization  of  the  company.  These  bonds 
were  not  sold  until  the  board  of  directors,  some  months  later, 
authorized  their  sale  by  an  agent  of  the  company.  It  was  held 
that  the  act  of  the  directors  in  authorizing  their  sale  was  equiva- 
lent to  an  original  authority  to  issue  the  bonds,  and  constituted 
an  adoption  of  the  mortgage  previously  executed  as  security 
therefor. 

In  Williams  v.  St.  George's  Harbor  Co.,43  the  plaintiff  had 
withdrawn  his  opposition  to  the  bill  creating  the  defendant  cor- 
poration, in  consideration  of  the  promise  of  the  promoters  that 
the  cost  of  the  plaintiff's  opposition  should  at  once  be  paid  by 
the  promoters,  that  an  additional  £250  should  be  paid  to  the 
plaintiff  within  one  month  after  the  passing  of  the  act,  and  that 
the  further  sum  of  £1750  should  be  paid  to  him  before  the 
formation  of  the  railway,  in  satisfaction  of  consequential  damages 
to  his  property.  After  the  company  had  been  formed  the  plaintiff 
brought  suit  against  it  for  the  cost  of  his  opposition  to  the  bill 
and  the  first  £250  payable  under  the  agreement,  and  judgment  in 
this  action  was  by  consent  entered  against  the  company.  The 
plaintiff  subsequently  brought  suit  for  the  additional  £1750  pay- 
able under  the  agreement.  The  court  held  that  the  consent  of  the 
defendant  to  the  entry  of  judgment  against  it  in  the  first  suit, 
amounted  to  a  recognition  of  the  binding  force  of  the  promoters' 
agreement,  and  that  the  corporation  was  liable  thereunder. 

In  Ireland  v.  Globe  Milling  &  Reduction  Co.,  the  subscribers  to 
the  stock  of  a  proposed  corporation  had  entered  into  an  agreement 
that  their  shares  should  not  be  transferred  without  first  giving  to 
the  corporation  an  option  to  purchase.  Upon  the  organization 
of  the  company  the  incorporators  adopted  a  by-law  of  like  effect, 
and  the  corporation  thereupon  issued  its  shares  to  the  subscribers. 

42.  93  111.  153,  164-166.  43.  2  DeG.  &  J.  547. 


PROMOTERS'  CONTRACTS.  95 

The  court  held  that  the  by-law  was  invalid  44  and  that  the  act  of 
the  corporation  in  issuing  the  certificates  did  not  amount  to  a 
ratification  of  the  agreement  giving  it  preemptive  rights.40 

It  is  held  in  Tift  v.  Quaker  City  National  Bank46  that  the 
mere  silence  of  the  directors  when  the  claim  of  the  plaintiff  was, 
in  his  presence,  called  to  their  attention,  was  not  such  an  act  of 
"  ratification  "  as  to  bind  the  corporation. 

It  is  held  in  Browning  v.  Great  Central  Mining  Company  47 
that  the  issuing  by  the  directors  of  the  fully  organized  corpora- 
tion, of  a  prospectus  setting  forth  circumstances  that  would  arise 
only  upon  the  assumption  of  the  promoters'  contract,  is  strong 
evidence  of  such  assumption. 

It  has  been  held  that  the  assumption  and  payment  by  the  cor- 
poration, of  some  of  the  liabilities  of  the  promoters,  has  no 
tendency  to  show  an  assumption  by  it  of  other  and  different 
liabilities  incurred  by  them.48 

As  the  contract  of  the  promoters  cannot  become  binding  upon 
the  corporation  by  ratification,  and  the  liability  of  the  company 
must  be  based  upon  some  new  agreement,  express  or  implied,  a 

44.  Ireland    v.    Globe    Milling    &  circumstances  that  do,  and  the  cir- 
Reduction  Co.,  19  R.  I.  180,  32  Atl.  cumstances   that   do   not,   show   as- 
921,  29  L.  R.  A.  429,  61  Am.  St.  Rep.  sumption  by  the  corporation  of  the 
756  liabilities    of    the    promoters'    con- 

45.  20  R.  I.  190,  38  Atl.  116,  38  L.  tracts,  are  Arapahoe  Investment  Co. 
R.  A.  299.  v.   Platt,  5  Colo.  App.  515,  39  Pac. 

46.  141  Pa.   550,   21   Atl.  660,   38  584;  Colorado  Land  &  Water  Co.  v. 
Am.   &  Eng.   Corp.   Cas.   339,    (fol-  Adams,  5  Colo.  App.  190,  37  Pac.  39 ; 
lowed  in  Cushion  Heel  Shoe  Co.  v.  Tuttle  v.  George  H.  Tuttle  Co.,  101 
Hartt,  181  Ind.  167,  103  N.  E.  1063,  Me.    287,    292,    64    Atl.   496,   499,   8 
50   L.    R.    A.   N.    S.   979),   and   see  Am.   &   Eng.   Ann.   Cas.   260;   Bond 
Browning  v.  Great  Central  Mining  v.   Pike,  101  Minn.  127,  111  N.  W. 
Co.,  5  H.  &  N.   856,  864,  29   L.   J.  916;  Hall  v.  Herter  Bros.,  83  Hun 
Exeh.  399.  (N.    Y.)    19,    23,    31    Supp.    692,   64 

47.  5  H.  &  N.  856,  29  L.  J.  Exch.  St.   R.  378,   and   see  same  case  on 
399.  a  later  appeal,  90  Hun  280,  35  Supp. 

48.  Church  v.  Church  Cementico  769,  70  St.  R.  273,  affirmed,  157  N.  Y. 
Co.,  75  Minn.  85,  77  N.  W.  548.  894,  51  N.  E.  1091. 

Other    cases    illustrative    of    the 


96  THE  LAW  OF  PROMOTERS. 

mere  resolution  of  the  directors  not  communicated  to  the  opposite 
party  and  not  followed  by  any  act  from  which  a  new  agreement 
might  be  implied,  does  not  subject  the  corporation  to  the  obliga- 
tions of  the  promoters'  contract  or  entitle  the  other  party  to  pro- 
ceed thereon.49  A  new  agreement  might  perhaps  be  inferred  from 
a  resolution  of  the  directors  adopted  in  the  presence  of  the  other 
party.50 

§  55.  Necessity  of  consideration. 

It  has  been  said  that  in  order  to  render  a  corporation  liable 
for  the  payment  of  a  debt  contracted  by  its  promoters  prior  to 
its  organization,  there  must  be  shown,  not  only  a  promise  of  the 
corporation  to  pay  the  debt,  but  the  receipt  and  acceptance  by  it 
of  that  for  which  the  debt  was  incurred.51  This  may  not  always  be 
strictly  true,  but  the  obligation  of  the  corporation  must  rest 
upon  a  new  agreement.  That  agreement  must,  to  be  enforceable, 
be  founded  upon  some  consideration,  and  the  mere  naked  promise 
of  the  corporation  to  pay  debts  incurred  by  the  promoters  from 
which  it  has  derived  no  benefit,  creates  no  enforceable  obligation.52 

§  56.  Liability    of    corporation    resulting    from    acceptance    of 

benefit  of  promoter's  contract. 

The  rule  is  well  settled  in  this  country  that  if  a  corporation, 
after  it  has  become  fully  organized  and  capable  of  contracting, 

49.  Clarke  v.  Omaha  &  S.  W.  R.  and   see   Tift   v.    Quaker   City   Na- 
R.  Co.,  5  Neb.  314,  324,  325 ;  In  re  tional  Bank,  note  46,  supra. 
Johannesburg  Hotel  Co.,  1891,  1  Ch.          51.  Western  Screw  &  Manfg.  Co. 
Div.  119,  130-131;  North  Sidney  I.  v.  Cousley,  72  111.  531,  534;  Reich- 
&  T.  Co.  v.  Higgins,  1899  App.  Gas.  wald  v.  Commercial  Hotel  Co.,  106 
263 ;   Melhado  v.   Porto  Alegre  Ry.  111.  439,  448 ;  Chilcott  v.  Washington 
Co.,  L.  R.  9  C.  P.  Cas.  503,  506,  507 ;  State    Colonization    Co.,    45    Wash. 
In  re  Empress  Engineering  Co.,  L.  148,  153,  88  Pac.  113,  115. 

R.   16  Ch.   Div.   125,   and   see  per-  52.  Church  v.  Church  Cementico 

haps  In  re  Dale  and  Plant,  Ltd.,  61  Co.,    75   Minn.   85,   77   N.   W.   548 ; 

L.  T.  N.  S.  206.  Richard  Brown  &  Son  Const.  Co.  v. 

50.  James  Young  &  Sons,  Ltd.,  v.  Bambrick  Bros.  Contr.  Co.,  150  Mo. 
Gowans,   10    Scots   Law   Times   85,  App.  505,  131   S.  W.  134;  William 


PROMOTERS'  CONTRACTS. 


97 


with  full  knowledge  of  the  facts,  accepts  the  benefits  of  a  contract 
assumed  to  have  been  made  on  its  behalf  by  its  promoters,  it  im- 
pliedly  agrees  to  perform  the  obligations  imposed  thereby.  It 
does  not  by  accepting  the  benefits  of  the  promoters'  contract,  pro- 
perly speaking,  either  "  ratify "  or  "  adopt  "  the  promoters' 
agreement,  but  if  it  accepts  a  conveyance  of  property,  or  the 
rendition  of  services,  known  by  it  to  be  made  or  performed  in 
pursuance  of  a  contract  with  the  promoters,  it  impliedly  agrees 
that  in  consideration  of  the  performance  by  the  other  party  of 
the  conditions  imposed  by  his  contract  with  the  promoters,  it  will 
on  its  part  perform  the  covenants  which  the  promoters  agreed 
should  be  performed  by  it.53  If  the  corporation  knowingly  ac- 


Allen  &  Co.  v.  Somerset  Hotel  Co., 
88  N.  Y.  Supp.  944. 

53.  Federal. — H awkeye  Gold 
Dredging  Co.  v.  State  Bank  of  Iowa 
Falls,  157  Fed.  Rep.  253  (reversed 
but  not  as  to  this  matter,  177  Fed. 
Rep.  164,  100  C.  C.  A.  626)  ;  Con- 
tinental Trust  Co.  v.  Toledo,  etc., 
R.  Co.,  86  Fed.  Rep.  929,  948 ;  Whit- 
ney v.  Wyman,  101  U.  S.  392,  25  L. 
Ed.  1050. 

California. — Jones  v.  Allert,  161 
Cal.  234,  118  Pac.  794. 

Idaho. — Mantle  v.  Jack  Waite 
Min.  Co.,  24  Idaho  613,  135  Pac.  854, 
136  Pac.  1130. 

Indiana. — Smith  v.  Parker,  148 
Ind.  127,  133-134,  45  N.  E.  770. 

Iowa. — Bobzin  v.  Gould  Balance 
Valve  Co.,  140  Iowa  744,  118  N.  W. 
40. 

Kansas. — Tryber  v.  Gerard 
Creamery  Co.,  67  Kan.  489,  73  Pac. 
83,  citing  7  Thompson  on  Corpora- 
tions, §  844. 

Maine. — Robbins  v.  Bangor  Ry.  & 
Electric  Co.,  100  Me.  496,  62  Atl. 
136,  1  L.  R.  A.  N.  S.  963,  citing  23 


Am.  &  Eng.  Encyc.  (2nd  ed.)  241,  10 
Cyc.  262;  and  the  note  to  Pittsburg 
Mining  Co.  v.  Spooner,  17  Am.  St. 
Rep.  161. 

Maryland. — Maryland  Apartment 
House  Co.  v.  Glenn,  108  Md.  377,  70 
Atl.  216. 

Massachusetts. — Penn  Match  Co. 
v.  Hapgood,  141  Mass.  145,  149,  7  N. 
E.  22.  And  see  North  Anson  Lum- 
ber Co.  v.  Smith,  209  Mass.  333,  95- 
N.  E.  838. 

Michigan. — Esper  v.  Miller,  131 
Mich.  334,  91  N.  W.  613,  and  cases 
cited. 

Minnesota. — Selover  v.  Isle  Har- 
bor Land  Co.,  91  Minn.  451,  98  N. 
W.  344,  100  Minn.  253,  111  N.  W. 
155. 

Mississippi. — Mulvihill  v.  Vicks- 
burg  Ry.  Power  &  Manfg.  Co.,  88 
Miss.  689,  704-705,  40  So.  647,  649- 
650,  citing  Whitney  v.  Wyman,  101 
U.  S.  392,  25  L.  Ed.  1050,  1  Beach 
on  Private  Corporations,  §  198,  2 
Clarke  &  Marshall  on  Private  Cor- 
porations, 306. 

Missouri.— Pitts    v.    Steele   Merc. 


98 


THE  LAW  OF  PROMOTERS. 


cepts  the  benefit  of  an  engagement  entered  into  by  its  promoters 
prior  to  its  organization,  the  courts  will  not  permit  it  to  deny 
that  it  at  the  same  time  agreed  to  assume  the  corresponding  bur- 
dens.54 

A  similar  rule  seems  in  England  to  be  enforced  in  chancery, 
but  the  question  is,  in  that  country,  not  free  from  confusion.55 


Co.,  75  Mo.  App.  221,  229;  Van 
Noy  v.  Central  Union  Fire  Ins.  Co., 
168  Mo.  App.  287,  153  S.  W.  1090. 

Nebraska. — Paxton  Cattle  Co.  v. 
First  Nat'l  Bank,  21  Neb.  621,  638 
et  seq,  33  N.  W.  271,  17  Am.  &  Eng. 
Corp.  Gas.  1,  59  Am.  Rep.  852. 

New  Hampshire. — Low  v.  Conn.  & 
Passumpsic  Rivers  R.  R.,  45  N.  H. 
370 ;  same  v.  same,  46  N.  H.  284. 

New  York. — Rogers  v.  N.  Y.  & 
Texas  Land  Co,  134  N.  Y.  197,  211, 
32  N.  E.  27,  48  St.  Rep.  263;  Sey- 
mour v.  Spring  Forest  Cemetery 
Ass'n,  144  N.  Y.  333,  341,  39  N.  E. 
365,  26  L.  R.  A.  859;  Oakes  v.  Cat- 
taraugus  Water  Co.,  143  N.  Y.  430, 
440,  38  N.  E.  461,  62  St.  Rep.  445, 
26  L.  R.  A.  544,  (dictum  in  dissent- 
ing opinion )  ;  Bommer  v.  Am.  Spiral, 
etc.,  Manfg.  Co.,  81  N.  Y.  468;  Van 
Schaick  v.  Third  Ave.  R.  R.  Co., 
49  Barb.  409,  affirmed,  38  N.  Y.  346 ; 
Davis  v.  Valley  Electric  Light  Co., 
61  Supp.  580;  Bell  v.  Shibley,  33 
Barb.  610,  613;  Dupignac  v.  Bern- 
strom,  37  Misc.  677,  76  Supp. 
381,  affirmed,  76  App.  Div.  105,  78 
Supp.  705. 

Penn. — Swisshelm  v.  Swissvale 
Laundry  Co.,  95  Pa.  367;  Girard  v. 
Case  Bros.  Cutlery  Co.,  225  Pa.  327, 
74  Atl.  201. 

South  Dakota. — Huron  Printing  & 
Bindery  Co.  v.  Kittleson,  4  S.  D.  520, 
527,  57  N.  W.  233;  Kaeppler  v.  Red- 


field  Creamery  Co.,  12  S.  D.  483,  81 
N.  W.  907. 

Texas. — Jones  v.  Smjth,  87  S.  W. 
210;  Weatherford  M.  W.  &  N.  W. 
Ry.  Co.  v.  Granger,  86  Tex.  350,  24 
S.  W.  795,  40  Am.  St.  Rep.  837 ;  Lan- 
caster G.  &  C.  Co.  v.  Murray  G.  S. 
'Co.,  19  Tex.  Civ.  App.  110,  47  S.  W. 
387,  writ  of  error  refused,  93  Tex. 
732. 

Utah. — Wall  v.  Niagara  Min.  & 
Sm.  Co.,  20  Utah  474,  59  Pac.  399. 

Wisconsin. — Buffington  v.  Bardon, 
80  Wis.  635,  639,  50  N.  W.  776. 

Cf.  Adams  v.  Empire  Laundry 
Mach.  Co.,  52  Hun  (N.  Y.)  610,  4 
Supp.  738,  also  Star  Corn  Millers 
Soc.  v.  Moore,  81  L.  T.  171. 

See  note  to  Cushion  Heel  Shoe 
Co.  v.  Hartt,  50  L.  R.  A.  N.  S.  984. 

54.  Smith  v.  Parker,  148  Ind.  127, 
45  N.  E.  770  (citing  1,  Morawetz  on 
Private  Corporations,   §  547,   549)  ; 
Huron   Printing   &   Bindery   Co.   v. 
Kittleson,  4  S.  D.  520,  57  N.  W.  233 ; 
Kaeppler  v.  Redfield  Creamery  Co., 
12  S.  D.  483,  81  N.  W.  907. 

55.  Howard  v.  Patent  Ivory  Mfg. 
Co.,  L.  R.  38  Ch.  Div.  156;  Spiller  v. 
Paris  Skating  Rink  Co.,  L.  R.  7  Ch. 
Div.  368;  In  re  Empress  Engineer- 
ing Co.,  L.  R.  16  Ch.  Div.  125 ;  Mel- 
hado  v.  Porto  Alegre  Ry.  Co.,  L.  R. 
9  C.  P.  Cas.  503;  Touche  v.  Metro- 
politan Ry.  Warehousing  Co.,  L.  R. 
6  Ch.  App.   671.     See  English  and 


PROMOTERS'  CONTRACTS.  99 

A  few  cases  in  this  country  which  might,  on  a  hasty  reading, 
seem  to  conflict  with  this  rule  should  perhaps  be  mentioned. 

In  Central  Park  Fire  Ins.  Co.  v.  Callaghan,56  it  was  claimed 
as  a  defense  to  an  action  to  foreclose  a  mortgage,  that  the  pro- 
moter had  as  a  condition  to  the  making  of  the  loan  by  the 
plaintiff  corporation  then  in  process  of  formation,  exacted  from 
the  defendant  a  subscription  to  its  shares.  The  court  said  that 
the  contract  of  the  promoter,  made  before  the  company  was  or- 
ganized, could  not  bind  the  company  after  its  organization  unless 
it  in  the  usual  way  adopted  and  ratified  his  conduct,  and  that 
any  improper  condition  imposed  by  the  promoter  would  not  in- 
validate the  transaction.  There  were  here  two  entirely  separate 
transactions  each  of  which  standing  alone  was  entirely  proper. 
There  does  not  seem  to  have  been  any  evidence  that  the  corpo- 
ration had  notice  of  the  connection  between  the  two. 

In  Miser  Gold  Mining  Co.  v.  Moody,57  the  defendants  had, 
pursuant  to  an  agreement  with  the  promoters,  conveyed  certain 
mining  property  to  the  plaintiff  corporation.  The  deed  was 
subsequently  returned  to  the  defendants  for  the  purpose  of  mak- 
ing a  correction  in  the  certificate  of  acknowledgment.  The  de- 
fendants mutilated  the  deed  and  refused  to  execute  a  new  one. 
The  corporation  sued  to  compel  the  execution  of  a  new  deed,  and 
the  defendant  pleaded  that  the  promoters  had  failed  to  finance 
the  corporation  in  accordance  with  their  agreement.  The  court 
held  that  the  breach  of  the  agreement  as  to  the  financing  of  the 
corporation  was  brought  about  by  the  defendants'  failure  to  re- 
turn the  deed,  and  added  that  the  agreement  of  the  promoters  was 
not  binding  upon  the  corporation.  Assuming  that  the  agreement 
claimed  by  the  plaintiff  was  properly  proved,  the  rights  of  the 

Colonial  Produce  Co.,  Ltd.,  1906,  2  rule  (§  58,  post),  which  is  probably 

Ch.  Div.  435;  Clinton's  Claim,  1908,  the  cause  of  the  confusion  in  the 

2  Ch.  Div.  515.  English  cases. 

In   connection   with    these   cases,  56.  41  Barb.  (N.  Y.)  448. 

should   be   read   the   discussion   of  57.  37  Colo.  310,  86  Pac.  335. 
Lord   Cottenham's    now   abandoned 


10Q  THE  LAW  OF  PROMOTERS. 

parties  depended  upon  the  intention  in  regard  to  the  sequence  of 
events.  If  the  defendants  were  to  execute  a  deed  and  the  promot- 
ers were  thereupon  to  finance  the  company  in  an  agreed  manner, 
the  failure  of  the  promoters  to  perform  could  not  affect  the  rights 
of  the  corporation.  If,  on  the  other  hand,  the  promoters  agreed 
to  organize  a  corporation  and  to  finance  it  in  a  manner  agreed 
upon  by  the  parties,  and  the  defendants  were  thereupon  to  convey 
their  property  to  the  corporation  and  receive  its  shares  in  pay- 
ment, they  certainly  could  not  be  compelled  to  make  a  conveyance 
to  a  corporation  which  did  not  correspond  to  that  Described  in 
the  agreement. 

In  Hecla  Consolidated  Gold  Mining  Co.  v.  O'Neill,58  certain 
mining  property  was  conveyed  to  a  trustee,  to  be  by  him  conveyed 
to  a  corporation  when  organized.  After  the  corporation  had 
been  organized  the  trustee  refused  to  make  a  conveyance,  claim- 
ing that  the  former  owners  of  the  property,  who  were  the  pro- 
moters of  the  corporation,  had  failed  to  pay  him  the  moneys 
agreed  upon  as  remuneration  for  his  services  as  trustee.  The 
court  held  that  the  trustee  was  bound  to  make  the  conveyance, 
saying  that  the  agreement  for  compensation  was  a  personal  one 
on  the  part  of  the  promoters  and  that,  even  if  they  had  assumed 
to  bind  the  corporation,  it  was  doubtful  that  their  promise  could 
be  enforced  against  it.  It  is  suggested  that  if  the  promise  was 
that  the  compensation  should  be  paid  by  the  corporation,  the 
corporation  accepting  a  conveyance  with  full  knowledge  of  the 
facts  might  well  have  become  bound  to  pay  in  accordance  with 
the  promoters'  promise.  Whether  the  trustee  would  have  been  per- 
mitted to  withhold  a  conveyance  until  his  compensation  was  paid 
is  a  different  question,  depending  upon  the  particular  terms  of  his 
agreement. 

§  57.  Enforcement  at  law  or  in  equity. 

There  seems,  at  times,  to  have  been  some  doubt  as  to  whether 

58.  47  N.  Y.  St.  Rep.  211,  19  Supp. 
592. 


PROMOTERS'  CONTRACTS. 

the  liability  of  a  corporation,  resting  upon  the  acceptance  by  it  of 
the  benefits  of  a  contract  made  by  its  promoters,  can  be  enforced 
at  law,  or  whether  the  corporation  can  be  held  liable  only  in 
equity.  There  appears  to  be  no  sound  reason  for  the  uncertainty 
of  the  courts  in  this  regard.  The  theory  of  the  corporate  lia- 
bility is  that  if,  after  it  is  fully  organized  and  capable  of  entering 
upon  contractual  relations,  it,  with  full  knowledge  of  an  agree- 
ment made  for  it  by  its  promoters,  accepts  the  benefits,  it  impliedly 
agrees  to  assume  the  burdens  thereof.  The  obligation  of  the 
corporation  rests  upon  an  implied  contract,  and  there  is  no  rea- 
son why  such  contract  should  not  be  enforced  at  law.  The  rule 
is  sometimes  stated  that  the  courts  will  not  permit  a  corporation, 
which  knowingly  accepts  the  benefits  of  an  agreement  entered  into 
by  its  promoters,  to  deny  that  it  agreed  to  assume  the  corre- 
sponding burdens.59  This,  however,  is  but  another  way  of  stating 
that  an  agreement  to  assume  the  burdens  will  be  implied.  While 
the  cases  are  not  wholly  free  from  confusion,  the  rule  seems,  in  this 
country,  to  be  that  the  obligations  of  a  corporation  resting  upon 
its  acceptance  of  the  benefits  of  the  promoters'  contract  can  be 
enforced  in  an  action  at  law.60  The  English  cases,  while  not  al- 

59.  See  cases  cited,  §  56,  note  54.  The  following  cases  were  appar- 

60.  Little  Rock  &  Ft.  Smith  R.  R.  ently   brought   on   the  law   side   of 
Co.    v.   Perry,   37   Ark.   164,   191,   9  the  court,  and  the  principle  under 
Am.  &  Eng.  R.  R.  Gas.  610;  Perry  discussion  recognized  without  refer- 
v.    Little    Rock    &    Ft.    Smith    Ry.  ence  to  any  theory  that  it  was  one 
Co.,   44   Ark.    383,   394-395 ;    Tuttle  to  be  applied  only  in  equity. 

v.  Geo.  H.  Tuttle  Co.,  101  Me.  287,  Maine. — Robbins  v.  Bangor  Ry.  & 

292,  64  Atl.  496,  499,  8  Am.  &  Eng.  Electric  Co.,  100  Me.  496,  62  Atl.  136, 

Ann.    Cas.    260;     Grape    Sugar    &  1  L.  R.  A.  N.  S.  963. 

Vinegar  Mfg.  Co.  v.  Small,  40  Md.  Maryland. — Maryland    Apartment 

395,    400 ;    Low    v.    Conn.    &    Pass.  House  Co.  v.  Glenn,  108  Md.  377,  70 

Rivers    R.    R.,   45   N.   H.   370,   378;  Atl.  216. 

same  case  on  a  later  appeal,  46  N.  Missouri. — Pitts  v.  Steele  Mercan- 

H.  284.     Cf.  Van  Schaick  v.  Third  tile  Co.,  75  Mo.  App.  221. 

Ave.  R.  R.  Co.,  49  Barb.  409,  415,  New     York.— Grier     v.     Hazard, 

affirmed,  38  N.  Y.  346 ;  also  Titus  v.  Hazard  &  Co.,  13  Supp.  583,  38  St. 

Catawissa  R.  R.,  5  Phila.  172.  Rep.  462,  affirmed,  14  Supp.  784,  39 

St.  Rep.  74. 


1Q2  THE  LAW  OF  PROMOTERS. 

together  clear,  seem  to  indicate  that  the  liability  of  a  corporation 
based  upon  its  acceptance  of  the  benefits  of  the  promoters'  con- 
tracts can  be  enforced  only  in  equity.61 

§  58.  Lord  Cottenham's  rule. 

Care  must  be  taken  to  differentiate  between  the  liability  of  a 
corporation  because  of  its  acceptance,  after  complete  organization, 
of  the  benefit  of  the  promoters'  contracts,  and  the  supposed  lia- 
bility of  the  corporation  imposed  by  Lord  Cottenham's  long  since 
abandoned  rule. 

It  seems  in  the  early  days  of  railroad  building  in  England  to 
have  been  not  unusual  for  the  owners  of  lands  along  the  route  of 
a  projected  road  to  oppose,  or  threaten  to  oppose,  the  granting 
of  a  corporate  charter,  and  then  to  withdraw  that  opposition 
upon  the  promise  of  the  promoters  that  the  corporation  would 
locate  a  station  at  some  point  deemed  beneficial  to  the  land  owner, 
or  take  a  certain  portion  of  his  land  at  an  agreed  price,  or 
pay  him  a  stipulated  sum  for  consequential  damages,  or  grant 
him  some  other  real  or  supposed  benefit  in  consideration  of  the 
withdrawal  of  his  opposition.  After  the  opposition  had  been 
withdrawn  and  the  act  of  parliament  passed,  the  corporation 
sometimes  refused  to  carry  out  the  promises  made  by  its  pro- 
moters. Lord  Cottenham  ruled,  and  his  ruling  was  at  one  time 

Ohio. — City  B'ld'g  Ass'n  v.   Zah-  Washington. — Chilcott    v.    Wash- 

ner,  6  Ohio  Dec.   Reprint  1068,  10  ington    State    Colonization    Co.,    45 

Am.  L.  Rec.  181.  Wash.  148,  88  Pac.  113. 

Pennsylvania. — Bell's   Gap   R.    R.  Wisconsin. — Bufflngton  v.  Bardon, 

Co.   v.  Christy,   79   Pa.  54,   21   Am.  80  Wis.  635,  50  N.  W.  776. 

Rep.    39;    Swisshelm    v.    Swissvale  61.  Spiller  v.  Paris  Skating  Rink 

Laundry  Co.,  95  Pa.  367.  Co.,    L.    R.    7   Ch.    Div.   368;   In  re 

Tennessee. — Pittsburg    &   Tennes-  Empress  Engineering  Co.,  L.  R.  16 

see  Copper  Co.  v.  Quintrell,  91  Tenn.  Ch.    Div.    125 ;    Melhado    v.    Porto 

693,  20  S.  W.  248.  Alegre  Ry.  Co.,  L.  R.  9  C.  P.  Gas. 

Texas.— Lancaster  G.  &  C.  Co.  v.  503 ;  Howard  v.  Patent  Ivory  Co.,  L. 

Murray  G.  S.  Co.,  19  Tex.  Civ.  App.  R.  38  Ch.  Div.  156. 
110,  47  S.  W.  387 ;  writ  of  error  re- 
fused, 93  Tex.  732. 


PROMOTERS'  CONTRACTS. 


103 


generally  followed,  that  it  would  be  inequitable  to  permit  the  corpo- 
ration which  had  obtained  its  charter  partly  as  a  result  of  the 
withdrawal  of  the  plaintiff's  opposition,  and  thus  received  the  full 
benefit  of  the  promoters'  agreement,  to  refuse  to  perform  the 
obligations  thereof,  and  that  equity  would  compel  performance.62 
Lord  Cottenham's  rule  was  questioned  by  the  House  of  Lords 
in  Preston  v.  The  Proprietors  of  the  Liverpool,  Manchester,  etc., 
R.  R.  Co.63  and  disapproved  in  Caledonian  and  Dumbartonshire 
Junction  R.  R.  Co.  v.  Magistrates  of  Helensburgh.64 


62.  Edwards  v.  The  Grand  Junc- 
tion Ry.  Co.,  1  Mylne  &  Cr.  650,  1 
Railway  Gas.  173,  (1836)  by  Lord 
Chancellor  Cottenham  (Opinion  of 
Vice  Chancellor  reported  7  Sim. 
337)  ;  Stanley  v.  Chester  &  Birken- 
head  Ry.  Co.,  3  Mylne  &  Cr.  773, 
(1838)  by  Lord  Cottenham  (Opin- 
ion of  Vice  Chancellor  reported  9 
Sim.  264;  1  Railway  Cas.  58)  ;  Lord 
Petre  v.  Eastern  Counties  Ry.  Co., 
1  Railway  Cas.  462,  (1838)  by  Lord 
Cottenham ;  Doo  v.  London  &  Croy- 
don  Ry.  Co.,  1  Ry.  Cas.  257,  (1839) 
by  Lord  Cottenham ;  Aldred  v.  North 
Midland  Ry.  Co.,  1  Railway  Cas. 
404,  (1839)  by  Vice  Chancellor 
Shadwell ;  Preston  v.  Liverpool, 
Manchester,  etc.,  Ry.  Co.,  1  Sim.  N. 
S.  586,  7  Eng.  Law  &  Equity  124,  21 
L.  J.  Ch.  N.  S.  61,  (1851)  by  Lord 
Cranworth,  V.  C.  (The  House  of 
Lords  in  this  case  came  to  a  con- 
trary conclusion,  basing  its  decision 
on  its  construction  of  the  contract, 
5  H.  L.  Cas.  605)  ;  Hawkes  v.  East- 
ern Counties  Ry.  Co.,  15  Eng.  Law  & 
Equity  358,  (1852)  by  Lord  Chan- 
cellor St.  Leonards;  The  Earl  of 
Lindsey  v.  Great  Northern  Ry.  Co., 
10  Hare  664,  (1853)  by  Vice  Chan- 


cellor Turner;  see  also  Greenhalgh 
v.  Manchester  &  Birmingham  Ry. 
Co.,  3  Mylne  &  Cr.  784,  791,  (1838) 
by  Lord  Cottenham,  aff'g,  9  Sim.  416; 
Gooday  v.  Colchester  &  Stour  Val- 
ley Ry.  Co.,  17  Beav.  132;  15  Eng. 
Law  &  Eq.  596  (1852)  ;  Webb  v. 
Direct  London  &  Portsmouth  Ry. 
Co.,  9  Hare  129,  (1851)  revd.,  1 
DeG.  M.  &  G.  521. 

The  foregoing  decisions,  or  some 
of  them,  are  cited  as  authority  in 
Low  v.  Connecticut  &  Passumpsic 
Rivers  R.  R.,  45  N.  H.  370,  (see  also 
46  N.  H.  284),  the  court  over- 
looking the  subsequent  decisions  of 
the  House  of  Lords,  cited  in  the  suc- 
ceeding notes. 

In  Taylor  v.  Chichester  &  Mid- 
hurst  Ry.  Co.,  4  H.  &  C.  409,  (1866) 
(judgment  reversed,  L.  R.  2  Exch. 
356,  but  reinstated  L.  R.  4.  H.  L. 
628),  the  agreement  was  made  by 
an  existing  corporation  in  contem- 
plation of  the  extension  of  its  line. 
No  question  of  promoters'  contracts 
was  involved.  (See  L.  R.  4  H.  L. 
637). 

63.  5  H.  L.  Cas.  605,  617-618, 
(1856).  See  also  Eastern  Counties 


1Q4-  THE  LAW  OF  PROMOTERS. 

In  the  last  mentioned  case  an  agreement  had  been  entered  into 
by  the  Magistrates  of  Helensburgh  on  the  one  part,  and  the  Com- 
mittee of  Management  of  a  projected  railroad  on  the  other,  un- 
der which  the  Magistrates  agreed  to  afford  to  the  railroad  com- 
pany, if  it  should  obtain  its  act  of  incorporation,  certain  facilities 
enabling  it  to  carry  a  branch  line  through  the  streets  of  Helens- 
burgh,  to  the  harbor  and  quay  which  the  town  proposed  to  build, 
and  for  the  right  to  build  which  the  Magistrates  were  about  to 
apply  to  Parliament.  The  Magistrates  further  agreed,  by  pe- 
titioning Parliament  or  otherwise,  to  promote  the  objects  of  the 
projected  railroad  company.  The  committee  of  management,  on 
the  other  hand,  agreed  to  advance  to  the  magistrates  the  ex- 
penses of  preparing  the  plans  for  the  harbor  and  quay,  of  obtaining 
the  act  of  Parliament  therefor,  and  the  cost  of  constructing  the 
harbor  and  quay,  of  which  advances  the  railroad  was  to  be  repaid 
the  sum  of  £3,000  and  no  more.  Both  acts  of  Parliament  were 
obtained.  The  railroad  company,  however,  refused  to  carry  out 
the  agreement.  The  Magistrates  brought  suit  and  the  Court  of 
Sessions  gave  judgment  in  their  favor.  On  appeal  to  the  House 
of  Lords,  Lord  Chancellor  Cranworth  reviewed  the  decisions  of 
Lord  Cottenham  in  Edwards  v.  Grand  Junction  Railway  Co., 
Stanley  v.  Chester  &  Birkenhead  Ry.  Co.  and  Lord  Petre  v.  East- 
ern Counties  Ry.  Co.65  and  said  that  Lord  Cottenham's  decisions 
went  much  further  than  to  decide  that  if  the  company  took  the 
benefit  of  the  contracts  entered  into  by  third  persons  with  its 
promoters,  the  company  must  at  the  same  time  perform  the  obli- 
gations thereof  and  that  "  Lord  Cottenham  acted  on  the  prin- 
ciple that  a  company  incorporated  by  Act  of  Parliament  is,  or 
may  be,  bound  by  the  previous  contracts  of  those  by  whom  the 

Ry.  Co.  v.  Hawkes,  5  H.  L.  Gas.  331,  Shrewsbury   v.  North   Staffordshire 

356,  (1855).  Ry.  Co.,  L.  R.  1  Eq.  593,  14  W.  R. 

64.  2  Macq.  391,  411,  415,  2  Jur.  220. 

N.  S.  695,  (1856).    See  also  Earl  of  65.  See  note  62,  supra. 


PROMOTERS'  CONTRACTS. 


105 


act  of  incorporation  has  been  obtained.66  I  have  stated  my  reason 
for  thinking  that  such  a  doctrine  rests  on  no  sound  principle,  and 
may  lead,  as  in  Lord  Petre's  case  I  think  it  did  lead,  to  great 
injustice.  And  if,  therefore,  the  case  now  to  be  decided  was  in 
all  respects  similar  to  the  three  cases  I  have  referred  to,  what  I 
should  have  to  decide  would  be  whether  I  should  advise  your 
Lordships  to  adhere  to  the  precedents  established  by  Lord  Cotten- 
ham,  on  the  ground  that  it  is  unsafe  to  act  against  a  series  of 
decisions,  even  though  they  may  appear  not  to  rest  on  any  solid 
foundation,  or  to  depart  from  them  and  to  adopt  what  I  consider 
a  just  and  more  correct  principle."  The  judgment  of  the  Court 
of  Sessions  was  reversed  on  the  ground  that  the  contract  of 
the  promoters  attempted  to  commit  the  company  to  an  application 
of  its  funds  to  an  object  foreign  to  the  provisions  of  the  act  of 
incorporation. 

Lord  Cottenham's  rule  does  not  seem  to  have  been  further 
passed  upon.  Parliament  in  1864  enacted  the  Railways  Construc- 
tion Facilities  Act  which  provided  that  "  Contracts  relative  to 
the  purchase  or  taking  of  lands  for  the  railway,  entered  into  by  the 
promoters  before  the  incorporation  of  the  company  by  the  cer- 
tificate, shall  be  as  binding  upon  the  company  as  if  they  had  been 
entered  into  by  the  company."  67 

The  case  of  Caledonian  and  Dumbartonshire  Junction  R.  R.  Co. 
v.  Magistrates  of  Helensburgh,  in  which  the  court  disapproved 
of  Lord  Cottenham's  rule,  was  decided  by  the  House  of  Lords  in 
1856,  before  the  theory  had  been  developed  that  a  corporation,  by 
accepting  after  its  organization  the  benefits  of  a  contract  made 
by  its  promoters,  impliedly  agrees  to  assume  its  burdens.  The 
difference  between  the  principle  just  mentioned  and  Lord  Cotten- 
ham's rule  lies  in  the  fact  that  in  the  cases  decided  under  Lord 


66.  Lord  Cottenham's  decisions 
were  similarly  interpreted  in  Earl 
of  Shrewsbury  v.  North  Stafford- 


shire Ry.  Co.,  L.  R.  1  Eq.  593,  14  W. 
R.  220. 

67.  Stat.    27    &   28    Viet,    Chap. 
121,  §  30. 


106 


THE  LAW  OF  PROMOTERS. 


Cottenham's  rule  the  consideration  for  the  promises  of  the  pro- 
moters was  the  withdrawal  or  withholding  of  opposition  to  the 
act  of  incorporation.  The  benefit  received  was  the  birth  of  the 
corporation.  Until  the  company  had  been  brought  into  exist- 
ence by  the  passage  of  the  act  and  organized  thereunder,  it 
was  incapable  of  entering  into  a  binding  contract.  The  benefit 
which  it  received  from  the  withdrawal  of  the  opposition  was  there- 
fore received  at  a  time  when  it  was  still  incapable  of  contracting. 
The  theory  on  which  a  corporation  may  be  held  to  the  perform- 
ance of  the  provisions  of  the  promoters'  contract  if  it  accepts 
the  benefits  thereof,  is  that  it  enters  into  a  new  contract  when  it 
accepts  these  benefits.  If  the  benefit  of  the  promoters'  contract  is 
received  at  a  time  when  the  corporation  is  still  incapable  of  con- 
tracting, it  cannot  be  bound  by  an  implied  contract  entered  into 
at  that  time,  any  more  than  it  could  be  bound  by  the  original  con- 
tract of  the  promoters.68  The  situation  is  quite  different  from 
that  which  arises  when  a  corporation  after  its  complete  organ- 
ization deliberately  accepts  a  conveyance  or  transfer  of  prop- 
erty, or  the  rendition  of  services,  contracted  for  by  its  promoters. 
It  should,  before  closing  the  discussion  of  the  questions  relating 
to  Lord  Cottenham's  rule,  be  stated  that  while  the  corporation  is 
not  bound  by  the  promises  of  its  promoters  made  in  consideration 
of  the  withdrawal  of  opposition  to  the  granting  of  the  corporate 
charter,  there  is  no  reason,  except  a  possible  one  of  public  policy, 
why  such  agreement  should  not  be  enforced  against  the  promoters 
individually.69 


68.  See,  however,  Morton  v.  Ham- 
ilton College,  100  Ky.  281,  38  S.  W. 
1,  35  L.  R.  A.  275,  where  a  corpora- 
tion   was    held    bound    because    of 
benefits  received  before  its  organi- 
zation. 

69.  Bland    v.    Crowley,    6    Exch. 
522,  and  see  Lord  Howden  v.  Simp- 


son, 10  Ad.  &  El.  793,  affirmed,  sub 
nom.  Simpson  v.  Lord  Howden,  9 
Cl.  &  F.  61,  3  Ry.  Gas.  294. 

On  the  question  of  public  policy 
see  Scottish  N.  E.  Ry.  Co.  v.  Stew- 
art, 3  Macq.  382,  408;  Vauxhall 
Bridge  Co.  v.  Spencer,  2  Mad.  356. 


PROMOTERS'  CONTRACTS.  107 

§  59.  Obligation  of  corporation  to  pay  for  services  in  procuring 
contracts  accepted  by  it. 

The  question  as  to  the  liability  of  a  corporation  because  of  the 
acceptance  by  it,  of  the  benefits  of  a  contract  made  for  it  by  its 
promoters,  arises  in  another  aspect  when  the  promoters  agree  that 
the  corporation  shall  pay  for  services  rendered  in  procuring  for 
it  stock  or  bonus  subscriptions,  or  other  contracts,  and  the  cor- 
poration accepts  the  subscriptions  or  contracts  procured  by 
these  services  but  refuses  to  pay  compensation  therefor. 

This  situation  arose  in  Weatherford,  etc.,  Railway  Co.  v. 
Granger.70  In  that  case  the  plaintiff  had  agreed  to  assist  the 
promoter  in  raising  a  bonus  for  a  then  projected  railroad  com- 
pany, and  the  promoter  promised  that  the  company  would  pay 
the  plaintiff  for  his  services.  The  bonus  was  raised  and  accepted 
by  the  company,  and  the  plaintiff  brought  suit  against  it  to  re- 
cover the  reasonable  value  of  his  services.  The  court  said  "  Now, 
when  it  is  said  that  when  a  corporation  accepts  the  benefit  of  a 
contract  made  by  its  promoters,  it  takes  it  cum  onere,  it  is  im- 
portant to  understand  distinctly  what  is  meant.  There  is,  so  far 
as  this  matter  is  concerned,  a  radical  difference  between  a  promise 
made  on  behalf  of  the  future  corporation  in  the  contract  itself, 
the  benefits  of  which  the  corporation  has  accepted,  and  the  prom- 
ise in  a  previous  contract  to  pay  for  services  in  procuring  the  lat- 
ter to  be  made.  This  is  well  illustrated  by  the  facts  of  the  pres- 
ent case.  Here  a  proposition  was  made  on  behalf  of  the  company, 
by  its  promoters,  that  if  a  bonus  should  be  subscribed  and  paid  to 
it,  it  would  build  its  road  between  certain  points,  and  would  carry 
coal  at  a  certain  stipulated  rate.  By  accepting  the  bonus,  the 
company  became  bound  to  fulfil  the  stipulations  of  that  contract. 
That  was  the  burden  which  it  took  with  the  benefit  of  the  agree- 

70.  86  Tex.  350,  24  S.  W.  795,  40  W.  210.    See  also  Wright  v.  St.  Louis 

Am.  St.  Rep.  837,  (reversing  23  S.  W.  Sugar  Co.,  146  Mich.  555,  109  N.  W. 

425;  and  see  22  S.  W.  70,  rev'd,  85  1062.       Cf.     Maryland     Apartment 

Tex.  574,  22  S.  W.  959).    Quoted  in  House  Co.  v.  Glenn,  108  Md.  377,  70 

Jones     v.     Smith,     (Tex.)     87     S.  Atl.  216. 


108  THE  LAW  OF  PROMOTERS. 

merit.  But  it  also  appears  that  one  of  the  promoters  promised 
the  plaintiff,  that  if  he  would  assist  in  procuring  subscribers  to 
the  bonus,  the  company  would  pay  him  for  his  services.  This 
was  no  part  of  the  contract  the  benefits  of  which  were  taken  by  the 
defendant.  The  benefits  of  a  contract  are  the  advantages  which 
result  to  either  party  from  a  performance  by  the  other;  and  in 
like  manner  its  burdens  are  such  as  its  terms  impose.  A  more 
accurate  manner  of  stating  the  nature  of  the  plaintiff's  demand  is 
to  say,  that  the  defendant  has  accepted  the  benefit  of  the  plain- 
tiff's services  and  should  pay  for  them.  It  is  true,  in  one  sense, 
that  the  company  has  had  the  benefit  of  plaintiff's  services,  and  it  is 
equally  true  that  it  would  have  had  that  benefit  if  the  services 
had  been  rendered  under  an  employment  by  the  subscribers  to  the 
bonus ;  and  yet  in  the  latter  case  it  could  not  be  claimed  that  the 
company  would  be  liable  for  such  services,  unless  payment  for 
them  by  the  company  were  made  one  of  the  terms  of  the  contract 
between  the  company  and  the  subscribers." 

The  true  test  of  the  liability  of  a  corporation  because  of  its  ac- 
ceptance of  the  subscriptions  or  contracts  obtained  as  a  result  of 
services  rendered  under  a  contract  with  the  promoters,  is  whether 
the  corporation  has  done  any  act  from  which  an  agreement  to  pay 
the  compensation  promised  by  the  promoters  may  be  implied.  If, 
as  a  result  of  the  efforts  of  one  employed  by  the  promoters,  per- 
sons whom  he  has  interested  come  to  the  corporation  and  offer 
their  subscriptions,  it  can  hardly  be  said  that  the  corporation 
can  not  accept  these  subscriptions  without  impliedly  agreeing  to 
pay  for  the  services  by  which  the  subscribers'  interest  was  aroused. 
One  not  employed  by  the  corporation  does  not,  by  arousing  the 
interest  of  others,  create  a  class  of  persons  with  whom  the  corpo- 
ration may  not  do  business  without  subjecting  itself  to  a  collateral 
responsibility.  But  if,  as  would  generally  be  the  case,  the  corpo- 
ration accepts  and  uses  the  subscription  lists  gotten  up  by  the 
employee  of  the  promoters,  it  undoubtedly  accepts  the  benefit  of 
the  promoters'  contract  of  employment,  and  if  it  does  so  with 


PROMOTERS'  CONTRACTS.  109 

knowledge  of  the  facts,  it  impliedly  agrees  to  pay  the  promised 
compensation. 

§  60.  Materiality  of  circumstance  that  original  contract  made 
by  less  than  majority  of  incorporators. 

A  few  decisions  will  be  found,  holding  that  in  order  that  the 
corporation  may  be  bound  by  an  acceptance  of  the  benefits  of 
a  contract  made  on  its  behalf  before  complete  organization,  it 
must  appear  that  the  making  of  such  contract  was  authorized  by 
a  majority  of  the  incorporators. 

The  leading  case  is  Bell's  Gap  Railroad  Co.  v.  Christy.71  The 
court  in  that  case  said,  "  We  do  not  desire  to  controvert  the 
principle,  established  in  England,  and  to  some  extent  recognized! 
in  this  country,  that  when  the  projectors  of  a  company  enter 
into  contracts  in  behalf  of  a  body  not  existing  at  the  time,  but 
to  be  called  into  existence  afterwards,  then  if  the  body  for  whom, 
the  projectors  assumed  to  act  does  come  into  existence,  it  cannot 
take  the  benefit  of  the  contract  without  performing  that  part  of  it 
which  the  projectors  undertook  that  it  should  perform.  Conced- 
ing to  this  principle  its  full  force  and  effect,  we  are  unable  to 
see  its  application  to  the  facts  of  this  case.  It  may  very  well 
be  that  where  a  number  of  persons  not  incorporated  are  yet  in- 
formally associated  together  in  the  pursuit  of  a  common  object, 
and  with  the  intent  to  procure  a  charter  in  the  furtherance  of 
their  design,  they  may  authorize  certain  acts  to  be  done  by  one 
or  more  of  their  number,  with  an  understanding  that  compensation 
shall  be  made  therefor  by  the  company  when  fully  formed.  And 

71.  79  Pa.  54,  59,  21  Am.  Rep.  39.  Morton  v.  Hamilton  College,  100  Ky. 

This  decision  is  followed  in  Tift  v.  281,  38  S.  W.  1,  35  L.  R.  A.  275,  and 

Quaker  City   Natl.   Bank,   141   Pa.  Clarke  v.  Omaha  &  S.  W.  R.  R.  Co., 

550,  21  Atl.  660,  38  Am.  &  Eng.  Corp.  5  Neb.  314,  323 ;  Low  v.  Connecticut 

Gas.  339  and  Tygert  Allen  Fertilizer  &  Passumpsic  Rivers  R.  R.,  45  N.  H. 

Co.  v.  J.  E.  Tygert  Co.,  7  Pa.  Dist.  370,  379.    Cf.  Low  v.  Connecticut  & 

Ct.  430,  21  Pa.  C.  C.  193,  affirmed,  Passumpsic  Rivers  R.  R.,  46  N.  H. 

191  Pa.  336,  43  Atl.  224.     See  also  284,  297. 


THE  LAW  OF  PROMOTERS. 

if  such  acts  are  necessary  to  the  organization  and  its  objects,  and 
are  subsequently  accepted  by  the  company,  and  the  benefits 
thereof  enjoyed  by  them,  they  must  take  such  benefits  cum  onere, 
and  make  compensation  therefor.  But  the  projectors  or  pro- 
moters of  the  enterprise  within  the  meaning  of  the  rule  referred 
to,  evidently  must  be  a  majority  at  least  of  such  persons,  and 
not  one,  two,  or  three,  or  a  small  minority  thereof.  Such  min- 
ority can  have  no  more  authority  to  bind  the  association  or 
corporation  in  its  incipient  or  inchoate  condition  than  they 
would  have  to  bind  it  if  fully  organized." 

It  is  difficult  to  apprehend  the  materiality  of  the  question 
whether  the  original  contract  was  authorized  by  a  majority,  or 
a  minority,  of  the  incorporators  unless  the  majority  can  actually 
bind  the  corporation.72  If  the  liability  of  the  corporation  rests 
upon  an  acceptance  of  benefits  after  its  organization,  the  number 
or  identity  of  the  persons  who  ineffectively  assumed  to  act  for  it 
before  that  time,  is  a  matter  of  no  moment.73 

§  61.  Acceptance  must  be  with  full  knowledge. 

Before  it  can  be  held  that  the  corporation  has  by  an  acceptance 
of  the  benefits  of  the  promoter's  contract  assumed  the  burdens 

72.  See  ante,   §  47,  note  4,  also  in  which  case  the  court  says,   (21 
post,  §  84,  note  14.  Neb.  645,  33  N.  W.  282)  that  grant- 

73.  Jones  v.  Smith   (Tex.),  87  S.  ing  the  entire  want  of  power  of  the 
W.  210,  speaks  of  the  adoption  of  officers  and  promoters,  the  retaining 
the  unauthorized  or  officious  acts  of  of   possession   of   the  consideration 
others.     In   Low   v.   Connecticut  &  after    organization,    is   a    "  ratifica- 
Passumpsic  Rivers  R.  R.,  45  N.  H.  tion "    of    the    contract.      See    also 
370,  378,   the  court  says  that  it  is  Gooday  v.  Colchester  &  Stour  Val- 
no  defense  that  there  was  no  au-  ley  Ry.  Co.,  17  Beav.  132,  15  Eng. 
thority  to  make  the  antecedent  re-  Law  &  Eq.  596.     It  is  said  in  In- 
quest or  that  no  such  request  was  surance  Bank  v.   Bank  of  U.  S.,  4 
ever  made.     See  also  same  v.  same,  Clark  (Pa.)  125,  134,  7  Leg.  Int.  129, 
46  N.  H.  284,  298.    This  statement  that  it  is  the  act  of  adoption,  and 
is  quoted   in  Paxton  Cattle  Co.   v.  not  the  act  of  the  parties  to   the 
First  National  Bank,  21  Neb.   621,  original  agreement,  which  makes  it 
643,  33  N.  W.  271,  281,  17  Am.  &  obligatory  on  the  corporation. 

Eng.  Corp.  Cas.  1,  59  Am.  Rep.  852, 


PROMOTERS'  CONTRACTS. 


Ill 


thereof,  it  must  be  shown  that  the  acceptance  was  made  with  full 
knowledge  of  the  facts.  Unless  the  corporation  had  full  knowl- 
edge, an  agreement  to  abide  by  the  terms  of  the  promoter's  con- 
tract cannot  be  implied.74  It  has  been  held  that  the  acceptance  by 
the  corporation  must  be  made  with  knowledge,  not  only  of  the 
nature  and  terms  of  the  promoter's  contract,  but  of  the  fact  that 
without  such  acceptance  it  would  not  be  bound  thereby.  An 
agreement  to  be  bound  by  the  terms  of  the  promoter's  contract 
cannot,  it  is  said,  be  implied  from  the  act  of  the  corporation 
resulting  from  a  mistaken  belief  that  it  is  already  bound.75 


74.  California. — Peek  v.  Stein- 
berg, 163  Cal.  127,  124  Pac.  834; 
Rideout  v.  Nat'l  Homestead  Ass'n, 
14  Cal.  App.  349,  112  Pac.  192. 

Colorado.— Possell  v.  Smith,  39 
Colo.  127,  88  Pac.  1064. 

Iowa. — Teeple  v.  Hawkeye  Gold 
Dredging  Co.,  137  Iowa  206,  114  N. 
W.  906. 

Missouri. — Pitts  v.  Steele  Mer- 
cantile Co.,  75  Mo.  App.  221,  231. 

Pennsylvania. — Tift  v.  Quaker 
City  National  Bank,  141  Pa.  550,  21 
Atl.  660,  38  Am.  &  Eng.  Corp.  Cas. 
339,  citing  Pittsburgh  &  Steuben- 
ville  R.  R.  Co.  v.  Gazzam,  32  Pa. 
340  and  Bennecke  v.  Insurance  Co., 
105  U.  S.  355,  26  L.  Ed.  990. 

Texas. — Weathersby  v.  Texas  & 
Ohio  Lumber  Co.,  —  Tex.  Civ.  App. 
— ,  146  S.  W.  243. 

Wisconsin. — Bufflngton  v.  Bardon, 
80  Wis.  635,  50  N.  W.  776,  citing  4 
Am.  &  Eng.  Ency.  of  Law  (1st  Ed.), 
page  201,  §  9. 

And  see  note  to  Cushion  Heel 
Shoe  Co.  v.  Hartt,  50  L.  R.  A.  N.  S. 
987. 

The  burden  of  proof  as  to  the 
company's  knowledge  is  on  the  party 


asserting  its  liability.  See  Abel  v. 
National  Reserve  Bank,  149  N.  Y. 
App.  Div.  710,  134  Supp.  379. 

It  was  said  in  Low  v.  Connecti- 
cut &  Passumpsic  Rivers  R.  R.,  46 
N.  H.  284,  297,  where  the  plaintiff 
claimed  for  services  rendered  in  the 
organization  of  the  corporation,  that 
it  was  not  necessary  that  the  precise 
character  and  extent  of  the  claim 
should  have  been  made  known  to 
the  stockholders,  but  that  they  were 
put  on  inquiry,  if  they  had  notice 
that  services  had  been  rendered  of 
such  a  nature  as  to  raise  the  pre- 
sumption that  they  were  to  be  paid 
for.  See  also  Low  v.  Connecticut  & 
Passumpsic  Rivers  R.  R.,  45  N.  H. 
370,  379. 

Whether  the  knowledge  of  an 
officer,  acquired  as  a  promoter,  is 
the  knowledge  of  the  corporation 
assuming  his  contract,  see  post,  §  71. 

75.  Tift  v.  Quaker  City  National 
Bank,  141  Pa.  550,  21  Atl.  660,  38 
Am.  &  Eng.  Corp.  Cas.  339,  citing 
Pittsburgh  &  Steubenville  R.  R.  Co. 
v.  Gazzam,  32  Pa.  340,  348  and 
Bennecke  v.  Insurance  Co.,  105  U. 
S.  355,  26  L.  Ed.  990.  See  also  In 


THE  LAW  OF  PROMOTERS. 

§  62.  Liability    of    corporation    accepting    benefit    of    contract 

not  contemplating  performance  by  it. 

The  acceptance  by  the  corporation  of  the  benefits  of  a  contract 
made  by  its  promoters,  does  not  create  a  contract  between  the 
corporation  and  the  opposite  party,  unless  the  promoters'  agree- 
ment provided  for  performance  by  the  corporation.  If  the  pro- 
moters enter  into  a  contract  by  which  they  bind  themselves  per- 
sonally to  the  performance  of  specified  conditions,  they  can,  after 
its  organization,  assign  their  rights  under  the  contract  to  the 
corporation,  just  as  to  any  other  person,  and  the  corporation 
will  be  compelled  to  perform  only  such  conditions  as  are  ex- 
pressly imposed  upon  it  by  its  agreement  with  the  promoters. 
It  can,  just  as  can  any  other  person,  accept  an  assignment  with- 
out assuming  the  obligations  of  its  assignors.  The  corporation 
becomes  obligated  to  the  opposite  party  only  if  the  promoters' 
agreement  contemplated  performance  by  it.  If  in  such  case,  with 
knowledge  of  all  the  facts,  it  accepts  the  benefits  of  the  promoters' 
agreement,  it  impliedly  agrees  to  undertake  such  performance  as 
the  promoters  stipulated  for  it.  The  mere  acceptance  from  the 
promoters  of  a  conveyance  of  their  properties,  or  a  transfer  of 
their  contract  rights,  does  not,  however,  commit  it  to  the  perform- 
ance of  any  obligations  other  than  such  as  it  may  agree  with  the 
promoters  to  perform.76 

re  Northumberland  Ave.  Hotel  Co.,  Co.  v.  Perry,  37  Ark.  164,  191,  et  seq, 

L.  R.  33  Ch.  Div.  16;  Coit  v.  Dow-  9  Am.  &  Eng.  R.  R.  Cas.  610. 

ling,   4   N.    W.   Terr.    464,    and   see  Colorado. — Ruby  Chief  Mining  & 

Bagot  Pneumatic  Tyre  Co.  v.  Clip-  Milling  Co.  v.  Gurley,  17  Colo.  199, 

per  Pneumatic  Tyre  Co.,  1901,  1  Ch.  29  Pac.  668. 

Div.  196,  aff'd,  1902,  1  Ch.  Div.  146.  Georgia.— Mitchell    v.    J.    A.    Gif- 

76.  Alabama.— Moore  &   Handley  ford  &  Co.,  133  Ga.  823,  67  S.  E.  197. 

Hardware  Co.  v.  Towers  Hardware  Indiana. — Davis   &   Rankin   Bldg. 

Co.,  87  Ala.  206,  6  So.  41,  13  Am.  &  Mfg.   Co.   v.   Hillsboro   Creamery 

St.   Rep.    23.  Co.,  10  Ind.  App.  42,  37  N.  E.  549. 

Arkansas — Perry    v.    Little   Rock  Kansas. — Tryber  v.  Girard  Cream- 

&  Fort  Smith  Ry.  Co.,  44  Ark.  383,  ery  Co.,  67  Kan.  489,  73  Pac.  83. 

395 ;  Little  Rock  &  Fort  Smith  R.  R.  M assachusetts.— Koppel    v.    Mass. 


PROMOTERS'  CONTRACTS. 


113 


It  has  even  been  doubted  that  a  corporation,  by  accepting  the 
benefits  thereof,  obligates  itself  to  the  performance  of  the  condi- 
tions of  a  contract  made  by  its  promoters  on  behalf  of  another 
and  different  corporation  contemplated  at  the  time  of  the  original 
contract.77 


Brick  Co.,  192  Mass.  223,  78  N.  B. 
128. 

Michigan. — M'Lellan  v.  Detroit 
File  Works,  56  Mich.  579,  23  N.  W. 
321. 

Nebraska. — Davis  et  al.  v. 
Ravenna  Creamery  Co.,  48  Neb.  471, 
478,  67  N.  W.  436,  438. 

Nevada. — Paxton  v.  Bacon  Mill 
&  Mining  Co.,  2  Nev.  257. 

New  fork. — Hall  v.  Herter  Bros., 
83  Hun  19,  21,  64  St.  Rep.  378,  31 
Supp.  692;  Stainsby  v.  Frazer 
Metallic  Boat  Co.,  3  Daly  98;  Din- 
geldein  v.  Third  Ave.  R.  R.  Co.,  22 
Super.  79,  reversed  on  another 
ground,  37  N.  Y.  575;  Wilbur  v.  N. 
Y.  Elec.  Const.  Co.,  58  Super.  539, 
554,  35  St.  Rep.  81,  12  Supp.  456; 
Adams  v.  Empire  Laundry  Mach. 
Co.,  52  Hun  610,  4  Supp.  738;  Mor- 
rison v.  Ogdensburgh,  etc.,  R.  R.  Co., 
52  Barb.  173. 

Texas. — Modern  Dairy  &  Cream- 
ery Co.  v.  Blanke  &  H.  Supply  Co., 
116  S.  W.  153. 

Washington. — Bash  v.  Culver  Gold 
Min.  Co.,  7  Wash.  122,  34  Pac.  462. 

Wyoming. — Grand  Rapids  Furni- 
ture Co.  v.  Grand  H.  &  O.  H.  Co., 
11  Wyo.  128,  70  Pac.  838,  72  Pac. 
687. 

United  Kingdom  and  Colonies. — 
In  re  Rotherham  Alum  &  Chemical 
Co.,  L.  R.  25  Ch.  Div.  103,  50  L.  T. 
N.  S.  219. 


See  note  to  Cushion  Heel  Shoe 
Co.  v.  Hartt,  50  L.  R.  A.  N.  S.  987. 

Cf.  Streator  Ind.  Tel.  Co.  v.  Con- 
tinental Tel.  Const.  Co.,  217  111.  577, 
75  N.  E.  546. 

The  corporation  is  not  liable  to 
the  lender,  for  moneys  borrowed  by 
the  promoter  upon  his  personal  note 
and  paid  into  the  treasury  of  the 
corporation.  Ellis  v.  Western  Nat. 
Bank,  136  Ky.  310,  124  S.  W.  334. 

The  mere  fact  that  the  lender  ac- 
cepts the  note  of  the  promoter,  does 
not,  however,  necessarily  bar  a 
recovery  from  the  corporation. 
Schreyer  v.  Turner  Flouring  Mills 
Co.,  29  Or.  1,  43  Pac.  719. 

77.  Tygert-Allen  Fertilizer  Co.  v. 
Jl  E.  Tygert  Co.,  7  Pa.  Dist.  Ct.  430, 
21  Pa.  C.  C.  193,  affirmed,  191  Pa. 
336,  43  Atl.  224,  and  see  perhaps 
Gulf  &  Brazos  Valley  Ry.  Co.  v. 
Winder,  26  Tex.  Civ.  App.  263,  63  S. 
W.  1043. 

Cf.  Preston  v.  Liverpool  Man- 
chester, etc.,  Ry.  Co.,  1  Sim.  N.  S. 
586,  7  Eng.  Law  &  Eq.  124,  21  L.  J. 
Ch.  N.  S.  61,  in  effect  reversed,  5  H. 
L.  Cas.  605;  Stanley  v.  Chester  & 
Birkenhead  Ry.  Co.,  9  Sim.  264,  1 
Ry.  Cas.  58,  aff'd,  3  Mylne  &  Cr.  773, 
(overruled  on  another  ground  in 
Caledonian,  etc.,  Ry.  Co.  v.  Magis- 
trates of  Helensburgh,  2  Macq.  391, 
408,  et  seq.,  2  Jur.  N.  S.  695). 


THE  LAW  OF  PROMOTERS. 

§  63.  The  same  subject. — Contracts  of  a  continuing  nature. 

A  different  situation  arises  in  regard  to  contracts  of  a  con- 
tinuing nature.  The  corporation  may  in  regard  to  such  contracts 
render  itself  liable  by  accepting  the  benefits  of  a  contract  made 
by  the  promoters  in  their  own  behalf.  If  a  person  who  has  ren- 
dered services  or  furnished  merchandise  or  materials  to  the  pro- 
moters as  individuals,  renders  similar  services,  or  delivers  similar 
merchandise  or  materials  to  the  corporation  organized  to  take 
over  their  business,  the  corporation  accepting  the  same  must  nec- 
essarily pay  therefor,  but  the  question  whether  the  ,other  party 
must  proceed  upon  quantum  meruit  or  quantum  valebat,  or  may 
claim  the  compensation  or  consideration  agreed  to  be  paid  by 
the  promoters,  depends  upon  whether  an  agreement  to  pay  com- 
pensation on  the  last  named  basis  can  under  all  the  circumstances 
fairly  be  implied.78  The  situation  is  precisely  the  same  where 
the  services  or  merchandise  instead  of  being  rendered  or  fur- 
nished to,  are  rendered  or  furnished  by,  the  promoters  and  the 
corporation  after  its  organization  continues  the  performance 
or  delivery  therof.79 

The  corporation  does  not  ordinarily,  by  continuing  the  con- 
tract, become  subject  to  the  liability  of  the  promoters  for  serv- 
ices rendered  to  them  before  the  corporate  organization.80 

§  64.  The  same  subject — Amended  contracts. 

If  a  contract  of  the  promoters,  originally  drawn  so  as  to  pro- 
vide for  performance  by  the  promoters  as  individuals,  is,  before 

78.  See  North  American  Loan  &  crat  Publishing  Co.,  87  Wis.  127,  58 

Trust  Co.  v.  Colonial  &  U.  S.  Mort-  N.  W.  238. 

gage  Co.,  83  Fed.  Rep.  796,  28  C.  C.  79.  See  North  American  Loan  & 

A.  88,  55  U.  S.  App.  157;  Heaton  v.  Trust  Co.  v.  Colonial  &  U.  S.  Mort- 

Clarke  &  Co.,  122  Iowa  716,  98  N.  gage  Co.,  83  Fed.  Rep.  796,  28  C.  C. 

W.   597;   Horowitz   v.   Broads  Mfg.  A.  88,  55  U.   S.  App.  157;   Bane  v. 

Co.,  54  N.  Y.  Misc.  569,  104  Supp.  Dow,  80  Wash.  631,  142  Pac.  23. 

988 ;  Standard  Printing  Co.  v.  Demo-  80.  See  Stone  v.  Fox  Machine  Co., 

145  Mich.  689,  109  N.  W.  659. 


PROMOTERS'  CONTRACTS.  H5 

it  is  carried  out,  modified  so  as  to  provide  for  performance  by  the 
corporation,  the  corporation  if  IS  Accepts  the  benefits,  will  be 
held  to  a  performance  of  the  obligations  of  the  contract.81 

Something  very  near  to  the  converse  of  this  proposition  arose 
in  Bagot  Pneumatic  Tyre  Co.  v.  Clipper  Pneumatic  Tyre  Co.82 
The  plaintiff  in  that  case  had  agreed  to  grant  to  one  Phelps,  or 
to  a  company  then  being  formed  by  him,  an  exclusive  license  to 
use  certain  patents.  This  license  was  afterwards  granted  to 
Phelps  individually.  Phelps  assigned  all  his  rights  under  the 
license  agreement  to  one  Piercy  acting  as  trustee  for  the  intended 
company.  The  company  upon  its  organization  adopted  the 
agreement  made  between  Phelps  and  Piercy.  The  license  was 
never  actually  assigned  to  the  company  by  Phelps  but  the  com- 
pany made  some  use  of  it.  In  an  action  by  the  plaintiff,  the 
original  licensor,  against  the  company,  it  was  held  that  there  was 
no  privity  of  contract  between  the  parties  and  therefore  no  right 
of  action.  The  explanation  of  the  case  seems  to  be  that  while 
the  original  agreement  provided  for  a  grant  either  to  Phelps  or 
the  company  then  being  formed,  the  license  was  actually  issued 
to  Phelps  individually,  and  that  Phelps'  assignee,  though  it  was 
the  company  mentioned  in  the  original  agreement,  took  the 
assignment  of  his  rights  without  assuming  his  obligations.  The 
result  might  have  been  different  had  the  license  been  granted  di- 
rectly to  the  company,  or  to  Phelps  in  trust  for  the  intended  com- 
pany.83 The  English  law  upon  the  question  of  the  corporate  lia- 
bility resulting  from  the  acceptance  of  the  benefits  of  the  pro- 
moters' contracts  is,  however,  in  such  an  uncertain  state  that  it 
is  impossible  to  determine  the  precise  effect  of  a  decision,  arising 
upon  such  an  unusual  state  of  facts. 

81.  Pratt  v.  Oshkosh  Match  Co.,      pany   in   the  name   of  the  original 
89  Wis.  406,  62  N.  W.  84.  licensee,   the   assignor   of  the  com- 

82.  1902,  1  Ch.  Div.  146,  affirming,      pany. 

1901,  1  Ch.  Div.  196.    It  was  in  this          83.  See    Van    Schaick    v.    Third 
case    suggested    that    the    licensor      Ave.  R.  R.  Co.,  38  N.  Y.  346. 
might  perhaps  have  sued  the  com- 


116 


THE  LAW  OF  PROMOTERS. 


§65.  The  same  subject. — Express  adoption. 

The  fact  that  the  contract  of  the  promoters  is  one  made  by  the 
promoters  to  be  performed  by  them  individually,  and  not  a  con- 
tract contemplating  performance  by  the  corporation  when  organ- 
ized, is  of  course  immaterial  if  the  corporation  not  only  accepts 
the  benefits  of  the  promoters'  contract  but  expressly  assumes  its 
obligations.84 


84.  California. — Northup  v.  Alta- 
dena  Min.  &  Inv.  Synd.,  6  Cal.  App. 
101,  91  Pac.  422. 

Connecticut. — Waterman's  Appeal, 
26  Conn.  96. 

Kansas. — Davis  &  Rankin  v. 
Dexter  Butter  &  Cheese  Co.,  52  Kan. 
693,  35  Pac.  776,  distinguished  in 
Tryber  v.  Girard  Creamery  Co.,  67 
Kan.  489,  496,  73  Pac.  83,  86. 

Mississippi. — Johnston  v.  Gumbel, 
19  So.  100. 

Missouri.— Shufeldt  v.  Smith,  139 
Mo.  367,  40  S.  W.  887. 

Nevada. — Paxton  v.  Bacon  Mill  & 
Mining  Co.,  2  Nev.  257,  261-262. 

New  York. — J.  H.  Lane  &  Co.  v. 
United  Oil  Cloth  Co.,  103  App.  Div. 
378,  92  Supp.  1061. 

It  has  been  held  that  where  the 
corporation  expressly  assumes  all 
the  debts  of  a  partnership  whose 
business  it  takes  over,  a  secret 
understanding  of  the  directors  that 
the  claims  of  certain  creditors  are 
to  be  excepted,  is  of  no  effect  and 
will  not  prevent  these  creditors  from 
insisting  on  payment  by  the  corpora- 
tion. Williams  v.  Colby,  53  Hun 
(N.  Y.)  637,  6  Supp.  459.  Compare, 
though  a  very  different  case,  Lee  v. 
Steinhart  Lumber  Co.,  66  Wash.  572, 
119  Pac.  1117. 

It  has  been  held  that  an  express 
assumption  by  the  corporation  of  all 


liabilities  incurred  in  the  partner- 
ship business  which  it  takes  over, 
includes  tort  as  well  as  contract  lia- 
bilities. Forbes  v.  Thorpe,  209  Mass. 
570,  95  N.  E.  955,  and  see  Ziemer  v. 
C.  G.  Bretting  Mfg.  Co.,  147  Wis. 
252,  133  N.  W.  139,  Am.  &  Eng.  Ann. 
Gas.  1912,  D.  1275. 

As  to  priorities  between  debts  of 
a  partnership  assumed  by  the  cor- 
poration and  subsequent  debts  of  the 
corporation  itself,  see  Lamkin  v. 
Baldwin  and  Lamkin  Mfg.  Co.,  72 
Conn.  57,  43  Atl.  593,  44  L.  R.  A. 
786. 

As  to  such  priorities  where  the 
debts  of  the  partnership  are  not  ex- 
pressly assumed,  see  Thorpe  v.  Pen- 
nock  Merc.  Co.,  99  Minn.  22,  108  N. 
W.  940,  9  Am.  &  Eng.  Ann.  Cas.  229. 

It  was  held  in  Smith  v.  Bowker 
Torrey  Co.,  207  Fed.  Rep.  967,  where 
the  corporation  had  issued,  in  pay- 
ment for  the  gross  personal  assets 
of  the  partnership,  shares  to  the  full 
value  thereof,  that  there  was  no 
consideration  for  the  further  agree- 
ment to  assume  the  partnership 
debts.  The  decision  rests  largely 
upon  the  particular  facts. 

As  to  whether  a  corporation  tak- 
ing over  the  business  of  a  partner- 
ship or  of  another  corporation 
thereby  necessarily  assumes  thf 
debts,  see  post,  §  67n. 


PROMOTERS'  CONTRACTS. 

§  66.  The  same  subject. — Obligations  cast  upon  assignee  by 

terms  of  contract. 

A  contract  with  the  promoters,  though  made  without  reference 
to  performance  thereof  by  a  corporation  to  be  formed  for  the  pur- 
pose, may  be  so  drawn  as  to  make  its  obligations  binding  upon 
any  assignee  thereof,  and  the  corporation  cannot,  in  such  case, 
any  more  than  can  any  other  assignee,  accept  an  assignment  of 
the  contract  without  at  the  same  time  assuming  responsibility  for 
the  performance  of  its  obligations.85 

§  67.  The  same  subject. — Where  corporation  is  organized  to 

escape  existing  obligations. 

If  the  promoters  resort  to  the  fiction  of  a  separate  corporate 
entity,  merely  to  avoid  obligations  to  which  they  had  before  its 
organization  become  subject  with  respect  to  the  business  trans- 
ferred to  the  company,  courts  of  equity  will,  when  the  ends  of 
justice  require  it,  look  beyond  the  fiction  of  the  corporate  entity 
and  hold  the  corporation  to  a  discharge  of  the  liabilities  previously 
resting  upon  its  members.86 

85.  Werderman    v.    Soci6t6    G6n-  Arkansas. — Carter    v.     Gray,     79 
erale  D'ElectricitS,  L.  R.  19  Ch.  Div.  Ark.  273,  282-283,  96  S.  W.  377,  380. 
246;  Bagot  Pneumatic  Tyre  Co.  v.  California. — Higgins  v.  California 
Clipper  Pneumatic  Tyre  Co.,  1902,  1  P.  &  A.  Co.,  122  CaL  373,  55  Pac. 
Ch.  Div.  146,  151 ;  Dansk  Rekylriffel  155 ;  Higgins  v.  California  P.  &  A. 
Syndikat  Aktieselskab  v.  Snell,  1908,  Co.,    147    Cal.    363,    81    Pac.    1070 ; 
2  Ch.  Div.  127.  Cornell  v.  Corbin,  64  Cal.  197,  30 

86.  Federal. — Phila.      Creamery      Pac.  629. 

Supply  Co.  v.  Davis  &  Rankin  Bldg.  Colorado. — Franklin  Mining  Co.  v. 

&  Mfg.  Co.,  77  Fed.  Rep.  879 ;  Davis  O'Brien,   22  Colo.   129,   141-142,  43 

Improved     Wrought     Iron     Wagon  Pac.  1016,  1020,  55  Am.  St.  Rep.  118. 

Wheel  Co.   v.  Davis  Wrought  Iron  Michigan- — Beal     v.     Chase,     31 

Wagon  Co.,  20  Fed.  Rep.  699,  700-  Mich.  490,  495,  532. 

701.  New  York- — Booth  v.  Bunce,  33  N. 

Alabama. — See  dictum  in  Moore  &  Y.  139,  88  Am.  Dec.  372. 

Handley   Hardware  Co.    v.   Towers  North  Carolina — Nat'l  Union  Bk. 

Hardware  Co.,  87  Ala.  206,  211,  6  of  Md.  v.  Rollings  worth,  135  N.  C. 

So.  41,  43,  13  Am.  St.  Rep.  23.  556,  47  S.  E.  618,  and  cases  cited. 


118 


THE  LAW  OF  PROMOTERS. 


§  68.  Liability  of  the  corporation  as  affected  by  nature  of  the 

particular  agreement. 
It  is  obvious  that  performance  of  a  contract  entered  into  by 


Pennsylvania. — Perm.  Knitting 
Mills  v.  Bibb  Mfg.  Co.,  12  Pa.  Super. 
Ct.  346,  351. 

Utah — Utah  Black  Marble  Co.  v. 
Am.  Marble  &  Onyx  Co.,  43  Utah  68, 
133  Pac.  472. 

United  Kingdom  and  Colonies. — 
Trustee  of  Gonville  v.  Patent  Cara- 
mel Co.,  Ltd.,  1912,  1  K.  B.  599. 

See  also  note  to  Oakes  v.  Catta- 
raugus  Water  Co.,  26  L.  R.  A.  551 ; 
note  to  Donovan  y.  Purtell,  1 
L.  R.  A.  N.  S.  176  and  note  to 
Cushion  Heel  Shoe  Co.  v.  Hartt,  50 
L.  R.  A.  N.  S.  979,  987.  See  Moore 
on  Fraudulent  Conveyances,  page 
56. 

See  also  post,  §  71. 

In  Bergen  v.  Porpoise  Fishing  Co., 
(41  N.  J.  Eq.  238,  3  Atl.  404),  the 
court  held  a  mortgage  made  by  the 
corporation,  fraudulent  as  against 
creditors  whose  debts  arose  out  of 
business  done  by  the  promoters  be- 
fore incorporation,  but  in  the  name 
of  the  company  afterwards  formed. 
This  judgment  was,  however,  re- 
versed on  appeal,  42  N.  J.  Eq.  397,  8 
Atl.  523. 

It  is  said  in  Paxton  v.  Bacon  Mill 
&  Mining  Co.,  (2  Nev.  257,  260)  that 
a  corporation  might  perhaps  be 
liable  for  the  debts  of  a  firm  whose 
business  it  takes  over,  if  no  persons 
other  than  the  members  of  the  firm 
are  taken  into  the  corporation. 

The  fact  that  there  are  some 
stockholders  who  were  not  subject 
to  the  obligations  sought  to  be 


avoided,  is  not  material,  if  all  the 
stockholders  had  notice  and  par- 
ticipated in  the  effort  to  avoid  the 
obligations  of  their  associates. 
Moore  &  Handley  Hardware  Co.  v. 
Towers  Hardware  Co.,  87  Ala.  206, 
211,  6  So.  41,  43,  13«Am.  St.  R.  23. 
It  has  been  held  that  a  subsequent 
transfer  of  shares  to  innocent  pur- 
chasers does  not  affect  the  cor- 
porate liability.  Higgins  v.  Cali- 
fornia P.  &  A.  Co.,  122  Cal.  373,  55 
Pac.  155,  same  v.  same,  147  Cal. 
363,  81  Pac.  1070. 

As  to  whether  a  corporation  tak- 
ing over  the  business  of  an  individ- 
ual, of  a  partnership,  or  of  another 
corporation,  thereby  assumes  its 
debts,  see: 

Federal— DuVivier  &  Co.  v.  Gal- 
lice,  149  Fed.  Rep.  118,  80  C.  C.  A. 
556,  and  note. 

Colorado. — Curtis,  Jones  &  Co.  v. 
Smelter  Nat'l  Bank,  43  Colo.  391, 
96  Pac.  172;  Denver  &  Santa  Fe 
Ry.  Co.  v.  Hannegan,  43  Colo.  122,  95 
Pac.  343,  16  L.  R.  A.  N.  S.  874,  127 
Am.  St.  Rep.  100. 

Georgia. — Culberson  v.  Alabama 
Const.  Co.,  127  Ga.  599,  56  S.  E. 
765,  9  L.  R.  A.  N.  S.  411,  9  Am.  & 
Eng.  Ann.  Cas.  507;  Georgia  Co. 
v.  Castleberry,  43  Ga.  187;  Green- 
berg-Miller  Co.  v.  Everett  Shoe  Co., 
138  Ga.  729,  75  S.  E.  1120;  Atlantic 
&  Birmingham  Ry.  Co.  v.  Johnson, 
127  Ga.  392,  56  S.  E.  482,  11  L.  R. 
A.  N.  S.  1119. 

Illinois — Lemars  Shoe  Co.  v.  Le- 


PROMOTERS'  CONTRACTS. 


119 


the  promoters  cannot  be  lawfully  undertaken  by  the  corporation, 
and  that  the  contract  cannot  become  binding  upon  it,  if  the  con- 
tract is  one  that  the  corporation  could  not  make  in  the  first  in- 


mars  Shoe  Mfg.  Co.,  89  111.  App. 
245;  Chicago  City  Ry.  Employees' 
Mutual  Aid  Ass'n  v.  Hogan,  124  111. 
App.  447 ;  Lawrence  v.  Nyberg 
Automobile  Works,  162  111.  App.  348. 

Iowa. — Luedecke  v.  Des  Moines 
Cabinet  Co.,  140  Iowa  223,  118  N.  W. 
456,  32  L.  R.  A.  N.  S.  616. 

Kentucky. — Guenther  v.  Am.  Steel 
Hoop  Co.,  116  Ky.  580,  25  Ky.  L.  R. 
795,  76  S.  W.  419. 

Minnesota. — Thorpe  v.  Pennock 
Mercantile  Co.,  99  Minn.  22,  108  N. 
W.  940,  9  Am.  &  Eng.  Ann.  Gas.  229 ; 
Swing  v.  Empire  Lumber  Co.,  105 
Minn.  356,  117  N.  W.  467. 

Missouri. — Slattery  v.  St.  Louis 
&  N.  O.  Transp.  Co.,  91  Mo.  217,  4 
S.  W.  79,  60  Am.  Rep.  245 ;  Shufeldt 
v.  Smith,  139  Mo.  367,  40  S.  W.  887 ; 
Bremen  Savings  Bank  v.  Branch- 
Crookes  Saw  Co.,  104  Mo.  425,  16 
S.  W.  209;  Berthold  v.  Holladay- 
Klotz  Land,  etc.,  Co.,  91  Mo.  App. 
233. 

Nebraska. — Campbell  v.  Farmers' 
&  Merchants'  Bank,  49  Neb.  143,  68 
N.  W.  344,  and  cases  cited ;  Austin 
v.  Tecumseh  Nat'l  Bank,  49  Neb. 
412,  68  N.  W.  628,  35  L.  R.  A.  444, 
59  Am.  St.  R.  543,  and  cases  cited. 
Tecumseh  Nat'l  Bank  v.  Saunders, 
50  Neb.  521,  70  N.  W.  42,  51  Neb. 
801,  71  N.  W.  779 ;  Buerstetta  v.  Te- 
cumseh Nat'l  Bank,  57  Neb.  504,  77 
N.  W.  1094;  Douglas  Printing  Co. 
v.  Over,  69  Neb.  320,  95  N.  W.  656; 
Baker  Furniture  Co.  v.  Hall,  76 
Neb.  88,  107  N.  W.  117;  111  N.  W. 


129;  113  N.  W.  267;  Hall  v.  Baker 
Furniture  Co.,  86  Neb.  389,  125  N. 
W.  628;  Reed  Bros.  v.  First  Natl. 
Bank  of  Weeping  Water,  46  Neb. 
168,  64  N.  W.  701. 

Nevada. — Paxton  v.  Bacon  Mill 
&  Min.  Co.,  2  Nev.  257. 

New  York. — Irvine  v.  New  York 
Edison  Co.,  207  N.  Y.  425,  101  N.  E. 
358,  Am.  &  Eng.  Ann.  Cas.  1914  C. 
441;  Goldmark  v.  Magnolia  Metal 
Co.,  28  App.  Div.  264,  51  Supp.  68; 
same  v.  same,  44  App.  Div.  35,  60 
Supp.  425,  aff' d,  170  N.  Y.  579,  63  N. 
E.  1117;  Thorn  v.  Volunteer  St. 
Gregory  Hosp.,  59  Misc.  442,  110 
Supp.  931. 

North  Carolina. — Nat'l  Union  Bk. 
of  Md.  v.  Hollingsworth,  135  N.  C. 
556,  47  S.  E  618,  and  cases  cited. 

Ohio. — Andres  v.  Morgan,  62 
Ohio  St.  236,  56  N.  E.  875,  78  Am., 
St.  R.  712,  and  cases  cited. 

Pennsylvania. — Dengler  v.  Helms, 
4  Walker  476,  481. 

South  Dakota. — Byrne  &  Hammer 
Dry  Goods  Co.  v.  Willis-Dunn  Co., 
23  S.  D.  221,  121  N.  W.  620,  29  L.  R. 
A.  N.  S.  589. 

Wisconsin.— Ziemer  v.  C.  G.  Bret- 
ting  Mfg.  Co.,  147  Wis.  252,  133  N. 
W.  139  Am.  &  Eng.  Ann.  Cas.  1912 
D.  1275,  and  cases  cited. 

Wyoming. — Durlacher  v.  Frazer,  8 
Wyo.  58,  55  Pac.  306,  80  Am.  St  R. 
918. 

See  note  to  El  Cajon  Portland 
Cement  Co.  v.  Robert  F.  Wentz,  En- 
gineering Co.,  92  C.  C.  A.  460-462; 


120 


THE  LAW  OF  PROMOTERS. 


stance,87  such  as  a  contract  that  is  contrary  to  public  policy,88 
or  one  that  is  beyond  the  scope  of  the  corporate  powers.89 


note  to  Austin  v.  Tecumseh  Natl. 
Bank,  59  Am.  St.  Rep.  543,  547-560; 
note  to  Atlantic  &  Birmingham  Ry. 
Co.  v.  Johnson,  11  L.  R.  A.  N.  S. 
1119;  note  to  Byrne-Hammer  Dry 
Goods  Co.  v.  Willis-Dunn  Co.,  29  L. 
R.  A.  N.  S.  589,  and  note  to  Lued- 
ecke  v.  Des  Moines  Cabinet  Co.,  32 
L.  R.  A.  N.  S.  616. 

In  Natl.  Union  Bank  of  Md.  v. 
Hollingsworth,  135  N.  C.  556,  47  S. 
E.  618,  where  a  surviving  partner, 
personally  liable  on  an  indorsement 
of  a  note  in  the  firm  name  made  by 
him  without  authority,  organized  a 
corporation  and  without  fraudulent 
intent  transferred  to  it  the  assets 
of  the  firm  in  payment  of  his  sub- 
scription to  its  capital  stock,  it  was 
held  that  the  corporation  was  not 
liable  for  the  debt  evidenced  by  the 
note. 

It  has  been  held  that  partners  who 
have  transferred  their  partnership 
business  to  the  corporation  remain 
primarily  liable  for  the  debts  of  the 
partnership.  Broyles  v.  McCoy,  5 
Sneed  (Tenn.)  602. 

87.  McArthur  v.  Times  Printing 
Co.,  48  Minn.  319,  51  N.  W.  216,  31 
Am.  St.  Rep.  653 ;  Schreyer  v.  Turner 
Flouring  Mills  Co.,  29  Or.  1,  43  Pac. 
719.  A  corporation  may  make  itself 
liable  for  money  loaned  to  it 
through  its  promoters  before  its  or- 
ganization; Schreyer  v.  Turner 
Flouring  Mills  Co.,  supra.  See  also 
Pitman  v.  Chicago  J.  L.  &  Z.  Co., 
113  Mo.  App.  513,  87  S.  W.  10; 
Quinn  v.  American  Bankers'  Assur. 
Co.,  183  Mo.  App.  8, 165  S.  W.  823. 


In  Ex  parte  Watson,  L.  R.  21  Q. 
B.  D.  301,  an  unincorporated  build- 
ing society  borrowed  money  on  the 
notes  of  its  directors,  though  it  had, 
as  then  constituted,  no  power  to  bor- 
row money.  The  society  was  after- 
wards incorporated  with  borrowing 
powers  and  the  coloration  gave 
its  note  for  the  moneys  borrowed 
by  the  society.  It  was  held  that  the 
note  was  unenforceable  as  the  orig- 
inal loan  was  unlawful. 

88.  Michigan. — Chicago   &   Grand 
Trunk  Ry.  Co.   v.   Miller,  91  Mich. 
166,  51  N.  W.  981. 

New  Hampshire. — Low  v.  Con- 
necticut &  Passumpsic  Rivers  R.  R., 
45  N.  H.  370,  376. 

New  York. — Wilbur  v.  New  York 
Electric  Construction  Co.,  58  Super. 
539,  35  St.  Rep.  81,  12  Supp.  456; 
Oakes  v.  Cattaraugus  Water  Co., 
143  N.  Y.  430,  437,  38  N.  E.  461,  62 
St.  Rep.  445,  26  L.  R.  A.  544. 

Pennsylvania. — Martin  v.  Second 
&  Third  Street  Passenger  Ry.  Co., 
3  Phila.  316;  Gearhart  v.  Standard 
Steel  Car  Co.,  56  Pitts.  L.  J.  94. 

Washington. — Hampton  v.  Bu- 
chanan, 51  Wash.  155,  98  Pac.  374. 

89.  First  Nat'l   Bank   v.   Church 
Federation   of    America,    129    Iowa 
268,    105   N.    W.    578;    Bradford    v. 
Metcalf,  185  Mass.  205,  207,  70  N. 
E.  40 ;  Tift  v.  Quaker  City  National 
Bank,  141  Pa.  550,  551,  21  Atl.  660, 
38  Am.  &  Eng.  Corp.  Gas.  339 ;  Pres- 
ton   v.    Proprietors    of    Liverpool, 
Manchester,    etc.,    Ry.    Co.,    5    H. 
L.   Cas.  605,  621;   Caledonian,  etc., 
Ry.  Co.   v.  Magistrates  of  Helens- 


PROMOTERS'  CONTRACTS.  121 

A  proper  agreement  of  hiring  entered  into  with  prospective  em- 
ployees of  the  corporation  may  become  binding  upon  the  corpo- 
ration after  its  organization.90 

It  has  been  held  that  as  the  officers  of  the  corporation,  in  the 
absence  of  express  agreement,  are  not  entitled  to  compensation 
for  the  ordinary  services  appertaining  to  their  office,  an  agree- 
ment between  the  incorporators  that  one  of  them  shall  be  made 
vice-president  and  receive  as  such  a  specified  salary,  does  not 
become  binding  upon  the  corporation  because  of  the  acceptance 
by  the  person  named  of  the  position  of  vice-president  and  the  per- 
formance by  him  of  the  services  incident  to  that  office.91 

While  a  corporation  cannot  enter  into  a  contract  before  it  has 
been  completely  organized,  there  is  no  objection  to  its  taking 
over  a  going  concern  as  of  a  date  prior  to  the  corporate  organ- 
ization.92 

§  69.  Varying  written  agreement  of  promoter. 

Where  the  actual  agreement  of  the  promoter  differs  from  the 
written  memorandum  thereof,  the  corporation,  assuming  the  per- 

burgh,  2  Macq.  391,  416,  et  seq.,  2  As  to  agreements  relating  to  the 

Jur.   N.    S.   695;   Leominster   Canal  location  of  the  corporate  plant,  see 

Navigation    Co.    v.    Shrewsbury    &  Bobzin  v.  Gould  Balance  Valve  Co., 

Hereford  Ry.   Co.,  3   K.  &  J.  654 ;  140  Iowa  744,  118  N.  W.  40. 

Earl  of  Shrewsbury  v.  North  Staf-  90.  Girard  v.  Case  Bros.  Cutlery 

fordshire  Ry.  Co.,  L.  R.  1  Eq.  593.  Co.,  225  Pa.  327,  74  Atl.  201,  and  see 

See,    however,    Bobzin    v.    Gould  Coe  v.  Leckrone  Coke  Co.,  30  Pa.  Co. 

Balance  Valve  Co.,  140  Iowa    744,  Ct.  113;  Boston  Deep  Sea  Fishing, 

118  N.  W.  40.  etc.,  Co.  v.  Ansell,  L.  R.  39  Ch.  Div. 

In    First    Nat'l    Bank    v.    Church  339.    See  ante,  §§  23-25. 

Federation    of    America,    129    Iowa  91.  Citizens'       Natl.       Bank      v. 

268,    105   N.    W.   578,   the   promoter  Elliott,  55  Iowa  104,  7  N.  W.  470, 

was,  however,  held  personally  liable.  39  Am.  Rep.  167. 

As  to  agreements  for  the  location  92.  Myott  v.  Greer,  204  Mass.  389, 
of  railroad  lines,  see  Woodstock  Iron  90  N.  E.  895 ;  Ziemer  v.  C.  G.  Bret- 
Co,  v.  Richmond  &  D.  Extension  Co.,  ting  Mfg.  Co.,  147  Wis.  252,  133  N. 
129  U.  S.  643,  9  Sup.  Ct.  402,  32  L.  W.  139,  Am.  &  Eng.  Ann.  Gas.  1912, 
Ed.  819.  D.  1275. 


122 


THE  LAW  OF  PROMOTERS. 


formance  of  the  contract  with  full  knowledge  of  the  facts,  may 
be  held  to  a  performance  of  the  actual  agreement  rather  than  of 
that  set  forth  in  the  memorandum.93 

§  70.  Subscription  agreements. 

A  subscription  may  be  enforced  by  the  corporation  without 
regard  to  the  performance  or  non-performance  of  the  collateral 
promises  of  the  promoters  by  which  the  subscription  was  induced.94 
This  is  not  so  much  because  the  promises  of  the  promoters  are  not 
binding  upon  the  corporation,  as  that  the  courts  will  not  allow 
the  terms  of  the  subscription  agreement  to  be  varied  to  the  preju- 
dice of  the  rights  of  other  subscribers.95 


93.  Stewart  v.  Norman    (Term.), 
39  S.  W.  758. 

94.  Indiana. — Shick     v.     Citizens 
Enterprise  Co.,  15  Ind.  App.  329,  44 
N.  E.  48,  57  Am.  St.  R.  230;  Fox  v. 
Allensville,    etc.,   Turnpike   Co.,    46 
Ind.  31,  35-36. 

Michigan. — Rapid  Hook  &  Eye  Co. 
v.  DeRuyter,  117  Mich.  547,  76  N. 
W.  76. 

Missouri. — Joy  v.  Manion,  28  Mo. 
App.  55. 

North  Carolina. — Boushall  v.  My- 
att,  167  N.  C.  328,  83  S.  E.  352. 

West  Virginia. — Clarksburg,  etc., 
Land  Co.  v.  Davis,  —  W.  Va.  — ,  86 
S.  E.  929. 

United  Kingdom  and  Colonies. — 
Felgate's  Case,  2  DeG.  J.  &  S.  456; 
Nickoll's  Case,  24  Beav.  639;  Gour- 
lie  v.  Chandler,  41  Nova  Scotia  341. 

And  see  post,  §  219. 

Cf.  Burrows  v.  Smith,  10  N.  Y. 
550;  Yonkers  Gazette  Co.  v.  Jones, 
30  N.  Y.  App.  Div.  316,  51  Supp. 
973. 

In  Mantle  v.  Jack  Waite  Min.  Co., 
24  Idaho  613,  135  Pac.  854,  136  Pac. 


1130,  an  agreement  of  the  promoters 
that  the  shares  subscribed  for  by 
the  plaintiff  should  be  non-asses- 
sable until  25  cents  a  share  had  been 
paid  on  the  stock  of  the  promoters, 
was  held  to  have  become  binding  on 
the  corporation  and  enforceable 
against  it. 

The  promoter's  promise  that  the 
subscribers  need  not  pay  their  sub- 
scriptions, may  save  the  latter  from 
liability  if  the  corporation  is  insol- 
vent, and  its  sole  creditor  and  the 
only  person  whose  interests  will  be 
served  by  enforcing  the  subscrip- 
tions, is  the  promoter  who  agreed 
that  the  same  should  not  be  en- 
forced. Carnahan  v.  Campbell,  158 
Ind.  226,  63  N.  E.  384. 

95.  California. — Quartz  Glass  & 
Mfg.  Co.  v.  Joyce,  —  Cal.  App.  — , 
150  Pac.  648. 

Massachusetts. — Nickerson  v.  Eng- 
lish, 142  Mass.  267,  8  N.  E.  45. 

Minnesota. — Minneapolis  Thresh- 
ing Mach.  Co.  v.  Davis,  40  Minn.  110, 
41  N.  W.  1026,  3  L.  R.  A.  796,  12 
Am.  St.  Rep.  701;  Wood  Harvester 


PROMOTERS'  CONTRACTS. 


123 


Stipulations  contained  in  the  subscription  agreement  itself, 


or 


Co.   v.   Jefferson,  71   Minn.  367,   74 
N.  W.  149. 

Missouri. — Ollesheimer  v.  Thomp- 
son Mfg.  Co.,  44  Mo.  App.  172,  181. 

Nebraska. — York  Park  Bldg. 
Assoc.  v.  Barnes,  39  Neb.  834,  840, 
58  N.  W.  440. 

New  Hampshire. — White  Mts.  R. 
R.  v.  Eastman,  34  N.  H.  124,  138,  et 
seg. 

New  fork. — Yonkers  Gazette  Co. 
v.  Jones,  30  App.  Div.  316,  51  Supp. 
973.  But  see  Syracuse  P.  &  O.  R.  R. 
Co.  v.  Gere,  4  Hun  392,  6  T.  &  C. 
636. 

Oklahoma. — Huster  v.  Newkirk 
Creamery  &  Ice  Co.,  42  Okla.  440, 
141  Pac.  790,  L.  R.  A.  1915,  A.  390. 

Pennsylvania. — Harvey  v.  Weit- 
zenkorn,  232  Pa.  447,  81  Atl.  447; 
Miller  v.  Hanover  Jctn.  &  Sus.  R.  R. 
Co.,  87  Pa.  95,  30  Am.  Rep.  349; 
Graff  v.  Pittsburg  &  S.  R.  R.  Co., 
31  Pa.  489;  Robinson  v.  Pittsburgh 
&  C.  R.  R.  Co.,  32  Pa.  334,  72  Am. 
Dec.  792. 

And  see  post,  §  219. 

It  has  been  held  that  one  who 
signs  his  name  to  a  subscription 
list  without  indicating  the  amount 
of  his  subscription,  and  thereby  in- 
duces others  to  subscribe,  is  bound 
for  the  number  of  shares  set  op- 
posite his  name  by  the  promoter,  and 
estopped  from  questioning  the  pro- 
moter's authority.  Silvain  v.  Ben- 
eon,  83  Wash.  271,  145  Pac.  175. 

It  has  been  held  that  an  under- 
standing that  a  subscription  shall 
not  become  binding  until  some  fur- 
ther act  is  performed  by  the  sub- 
scriber, is  valid,  and  available  as 


a  defense  to  an  action  to  enforce 
the  subscription.  Ada  Dairy  Assoc. 
v.  Mears,  123  Mich.  470,  82  N.  W. 
258,  and  see  White  v.  Kahn,  103 
Ala,  308,  15  So.  595. 

The  same  has  been  held  in  re- 
gard to  an  understanding  that  the 
subscription  agreement  shall  not  be 
delivered  to  the  corporation  until 
certain  conditions  have  been  ful- 
filled. Gilman  v.  Gross,  97  Wis. 
224,  72  N.  W.  885. 

It  has,  however,  been  held  that 
the  subscriber  is  in  such  case 
bound,  if  the  subscription  agree- 
ment, unconditional  on  its  face,  is 
delivered  to  the  corporation  with- 
out the  performance  of  the  condi- 
tion. Rehbein  v.  Rahr,  109  Wis. 
136,  85  N.  W.  315. 

Cf.  Cass  v.  Pittsburg  V.  &  C.  Ry. 
Co.,  80  Pa.  31. 

It  has  been  held  that  a  delivery 
in  escrow  cannot  be  made  to  a  coniv 
missioner  appointed  to  receive  sub- 
scriptions, as  he  is  the  person  to 
whom  the  absolute  delivery  would 
be  made,  and  delivery  in  escrow 
must  be  made  to  a  third  party. 
Wight  v.  Shelby  R.  R.  Co.,  16  B. 
Mon.  (Ky.)  4,  63  Am.  Dec.  522,  but 
compare  Cass  v.  Pittsburg  V.  &  C. 
Ry  Co.,  80  Pa.  31. 

A  collateral  agreement  of  the 
promoters,  to  purchase  from  a  par- 
ticular subscriber,  on  demand,  at 
cost,  the  shares  subscribed  for  by 
him  is  valid  and  enforceable.  Mor- 
gan v.  Struthers,  131  U.  S.  246, 
254,  255,  33  L.  Ed.  132,  9  Sup.  Ct. 
726;  McCampbell  v.  Obear,  —  Gal. 
App.  — ,  148  Pac.  942;  Meyer  v. 


124 


THE  LAW  OF  PROMOTERS. 


made  with  every  subscriber  thereto,  may  constitute  conditions 
precedent,  without  the  performance  of  which  the  subscriptions 
cannot  be  enforced,96  or  conditions  subsequent  which  the  cor- 
poration by  accepting  the  subscriptions  impliedly  agrees  to  per- 
form.97 

The  collateral  agreements  of  the  promoters  may,  if  the  rights  of 
other  subscribers  are  not  prejudiced,  be  enforced  against  the 
corporation  if  its  consent  to  be  bound  thereby  is  shown.98  There 
is  in  any  event  no  reason  why  the  promoters  should  not  be  held 
individually  liable  upon  their  promises.99 


Blair,  109  N.  Y.  600,  17  N.  E.  228, 
4  Am.  St.  Rep.  500;  McClymonds  v. 
Stewart,  2  Pa.  Super.  Ct.  310; 
Scranton  Luna  Park  Ass'n  v.  Ost- 
haus,  8  Lack.  Jur.  (Pa.)  345;  Kin- 
caid  v.  Overshiner,  171  111.  App.  37. 
An  agreement  to  "  guarantee  "  the 
subscriber's  "  money,"  is  an  agree- 
ment to  indemnify  him  against  loss, 
and  not  an  agreement  to  repur- 
chase his  shares,  and  the  subscriber 
must,  to  recover,  prove  his  loss. 
Norris  v.  Reynolds,  131  N.  Y.  App. 
Div.  818,  116  Supp.  106. 

96.  Rockford   R.   I.   &   St.   L.   R. 
R.  Co.  v.  Shunick,  65  111.  223;  Bob- 
zin  v.  Gould  Balance  Valve  Co.,  140 
Iowa  744,  118  N.  W.  40;  Audenried 
v.  East  Coast  Milling  Co.,  68  N.  J. 
Eq.  450,  455,  59  Atl.   577,  and   see 
Lake   Ontario    Shore  R.   R.   Co.   v. 
Curtiss,  80  N.  Y.  219. 

97.  Bobzin     v.      Gould     Balance 
Valve  Co.,  140  Iowa  744,  118  N.  W. 
40.     See  American  Home  Life  Ins. 
Co.  v.  Compere,  —  Tex.  Civ.  App. 
—   159  S.  W.  79,  80. 

To  bind  the  company  it  must 
appear  that  the  condition  was  to 
be  binding  upon  it,  and  not  the 
mere  personal  obligation  of  the 


promoters.    Russell  v.  Broadus  Cot- 
ton Mills  (Ala.),  39  So.  712. 

In  Morrow  v.  Nashville,  etc.,  Co., 
87  Tenn.  262,  10  S.  W.  495,  3  L.  R. 
A.  37,  a  condition  subsequent,  con- 
trary to  public  policy  and  void,  was 
held  no  bar  to  the  enforcement  of 
the  subscription.  In  U.  S.  Vinegar 
Co.  v.  Schlegel,  143  N.  Y.  537,  38 
N.  E.  729,  affirming,  67  Hun  (N. 
Y.)  356,  22  Supp.  407,  it  was  held 
that  subscriptions  to  the  stock  of 
a  corporation  could  not  be  avoided 
on  the  ground  that  the  company 
was  organized  for  an  illegal  pur- 
pose, where  there  was  nothing  to 
show  that  an  illegal  purpose  was 
intended,  except  certain  statements 
contained  in  the  printed  prospectus 
issued  by  the  promoters.  See  also 
United  States  Vinegar  Co.  v.  Foeh- 
renbach,  148  N.  Y.  58,  42  N.  E.  403, 
and  Clarksburg,  etc.,  Land  Co.  v. 
Davis,  —  W.  Va.  — ,  86  S.  E.  929. 

98.  See  Frankfort,  etc.,  Turnpike 
Co.  v.  Churchill,  6  T.  B.  Mon.  (Ky.) 
427,  and  see  cases  cited  in  preced- 
ing note. 

99.  Morgan  v.   Struthers,  131  U. 
S.   246,   33   L.   Ed.   132,   9   Sup.   Ct. 
726;  McCampbell  v.  Obear,  —  Cal. 


PROMOTERS'  CONTRACTS. 


125 


A  subscription  agreement,  like  any  other  agreement,  does  not 
ordinarily  become  binding  before  delivery,  and  the  mere  signature 
of  the  subscriber  is  of  no  effect  until  the  agreement  leaves  his 
hands ;  *  but  a  promoter  who  after  signing  the  subscription  agree- 
ment procures  other  subscriptions  to  be  made  upon  the  faith  of 
his  signature  is  bound,  though  the  agreement  has  not  left  his 
possession  2  at  least  in  those  jurisdictions  in  which  a  subscription 
agreement  is  held  binding  as  a  contract  between  the  subscribers.3 

§  71.  Notice  to  promoter  as  notice  to  the  corporation. 

As  the  promoters  are  not  the  agents  of  the  corporation,  and 
have  no  power  to  act  for  it,  notice  given  to  a  promoter  is  not  ordi- 
narily notice  to  the  corporation.4  If,  however,  the  promoters  later 
constitute  the  board  of  directors  and  the  only  stockholders  of  the 
corporation,  their  knowledge  attaches  to  the  corporation  and  the 
latter  is  subjected  to  any  equities  of  which  all  the  promoters  had 


App.  — ,  148  Pac.  942;  Meyer  v. 
Blair,  109  N.  Y.  600,  17  N.  E. 
228,  4  Am.  St.  Rep.  500;  Jessop  v. 
Ivory,  158  Pa.  71,  27  Atl.  840 ;  Scran- 
ton  Lima  Park  Assoc.  v.  Osthaus,  8 
Lack.  Jur.  (Pa.)  345;  McClymonds 
v.  Stewart,  2  Pa.  Super.  Ct.  310; 
Gourlie  v.  Chandler,  41  Nova  Scotia 
341,  350. 

1.  Greer  v.  Chartiers  Ry.  Co.,  96 
Pa.  391,  42  Am.  St.  Rep.  548;  Oil- 
man v.  Gross,  97  Wis.  224,  72  N.  W. 
885,  and  see  Rehbein  v.  Rahr,  109 
Wis.  136,  85  N.  W.  315. 

2.  Greer  v.  Chartiers  Ry.  Co.,  96 
Pa.  391,  42  Am.  St.  Rep.  548. 

3.  See  ante,  §  52. 

4.  Federal. — Davis     Improved 
Wrought  Iron  Wagon  Wheel  Co.  v. 
Davis    Wrought    Iron    Wagon    Co., 
20    Fed.     Rep.     699,     700;     Racine 
Seeder   Co.    v.    Joliet,   etc.,   Co.,   27 
Fed.  Rep.  367,  375. 

California. — Kiefhaber   Lumber 


Co.  v.  Newport  Lumber  Co.,  15  Cal. 
App.  37,  113  Pac.  691 ;  Peek  v.  Stein- 
berg, 163  Cal.  127,  124  Pac.  834. 

Colorado. — Franklin  Mining  Co. 
v.  O'Brien,  22  Colo.  129,  141,  43  Pac. 
1016,  1020,  55  Am.  St.  Rep.  118. 

Illinois. — Burt  v.  Batavia  Paper 
Mfg.  Co.,  86  111.  66. 

South  Dakota. — Huron  Printing 
&  Bindery  Co.  v.  Kittleson,  4  S.  D. 
520,  57  N.  W.  233. 

Wyoming. — Grand  Rapids  Furni- 
ture Co.  v.  Grand  Hotel  &  Opera 
House  Co.,  11  Wyo.  128,  70  Pac. 
838,  72  Pac.  687. 

Cf.  California,  etc.,  Min.  Co.  v. 
Manley,  10  Idaho  786,  81  Pac.  50. 
Appeal  dismissed  for  want  of  juris- 
diction, 203  U.  S.  579,  51  L.  Ed.  326, 
27  Sup.  Ct.  779;  Zeigler  v.  Valley 
Coal  Co.,  150  Mich.  82,  113  N.  W. 
775,  13  Am.  &  Eng.  Ann.  Cas.  90; 
Bang  v.  Brett,  62  Minn.  4,  63  N.  W. 
1067. 


126 


THE  LAW  OF  PROMOTERS. 


notice.5     The  promoters,  it  has  been  said,  are  under  such  circum- 
stances practically  the  corporation.6 

Notice  given  to  a  single  promoter  may  become  notice  to  the 
corporation  if  the  promoter,  after  the  organization  of  the  corpo- 
ration, becomes  one  of  its  agents  or  officers,  and  as  such  acts  for 
the  corporation  with  knowledge  of  the  facts  in  mind.7  This  is 


5.  Federal. — Nat'l  Conduit  Mfg. 
Co.  v.  Conn.  Pipe  Mfg.  Co.,  73  Fed. 
Rep.  491,  495;  York  Mfg.  Co.  v. 
Brewster,  174  Fed.  Rep.  566,  98  C. 
C.  A.  348;  Simmons  Creek  Coal  Co. 
v.  Doran,  142  U.  S.  417,  435,  436,  35 
L.  Ed.  1063;  Wilson  Coal  Co.  v. 
United  States,  188  Fed.  Rep.  545, 110 
C.  C.  A.  343 ;  Seeger  Refrigerator  Co. 
v.  American  Car  &  Foundry  Co.,  171 
Fed.  Rep.  416,  424,  affirmed,  (*«&. 
nom.  American  Car  &  Foundry  Co. 
v.  Seeger  Refrigerator  Co.),  178  Fed. 
Rep.  278,  101  C.  C.  A.  542. 

Arkansas. — Carter  v.  Gray,  79 
Ark.  273,  283,  96  S.  W.  377,  380. 

Colorado. — Franklin  Mining  Co.  v. 
O'Brien,  22  Colo.  129,  141-142,  43 
Pac.  1016,  1020,  55  Am.  St.  Rep.  118. 

Idaho. — Henry  Gold  Mining  Co.  v. 
Henry,  25  Idaho  333,  137  Pac.  523. 

Illinois. — Davis  &  Rankin  Bldg. 
Co.  v.  Colusa  Dairy  Ass'n,  55  111. 
App.  591. 

Indiana. — Davis  &  Rankin  Bldg.  & 
Mfg.  Co.  v.  Vice,  15  Ind.  App.  117, 
43  N.  E.  889. 

Kentucky. — Waddy  Blue  Grass 
Cr.  Co.  v.  Davis  &  Rankin  Bldg.  & 
Mfg.  Co.,  103  Ky.  579,  20  Ky.  L.  R. 
259,  45  S.  W.  895;  Middleton  v. 
Same,  20  Ky.  L.  R.  263,  45  S.  W. 
896. 

Maryland. — Hoffman  Steam  Coal 
Co.  v.  Cumberland  Coal  &  Iron  Co., 


16  Md.  456,  470-472,  77  Am.  Dec. 
311. 

Minnesota. — Mercantile  Nat'l  Bk. 
v.  Parsons,  54  Minn.  56,  55  N.  W. 
825,  40  Am.  St.  Rep.  299. 

Mississippi. — H olloway  &  Mc- 
Raney  Co.  v.  Brame,  83  Miss.  335, 
36  So.  1. 

New  Jersey. — Ransom  v.  Brinker- 
hoff,  56  N.  J.  Eq.  149,  162-163,  38 
Atl.  919,  reversed,  sub  nom.  Brinker- 
hoff  v.  Ransom,  57  N.  J.  Eq.  312,  41 
Atl.  725. 

Neiv  fork. — Thorn  v.  Volunteer 
St.  Gregory  Hosp.,  59  Misc.  442,  110 
Supp.  931;  McElwee  Mfg.  Cd.  v. 
Trowbridge,  62  Hun  471,  17  Supp. 
3,  43  N.  Y.  St.  R.  238;  Cumberland 
Coal  Co.  v.  Sherman,  30  Barb.  553. 

Texas. — Texas  Loan  Agency  v. 
Hunter,  13  Tex.  Civ.  App.  402,  409, 
35  S.  W.  399. 

And  see  Utah  Black  Marble  Co.  v. 
American  Marble  &  Onyx  Co.,  43 
Utah  68,  133,  Pac.  472,  where  the 
promoters  attempted  to  escape  their 
obligations  by  a  transfer  to  the  cor- 
poration. See  also  Freeman  v. 
Watts,  20  Det.  Legal  News  81.  See 
ante,  §  67,  but  see  §  46. 

6.  Sondheimer  v.  Graeser,  72  111. 
App.  41,  affirmed,  172  111.  293,  50  N. 
E.  174,  but  see  ante,  §  46. 

7.  Federal. — Y  o  u  n  g     Reversible 
Lock  Nut  Co.  v.  Young  Lock  Nut  Co., 


PROMOTERS'  CONTRACTS.  127 

undoubtedly  the  rule  in  those  jurisdictions  which  hold  that  notice 


72  Fed.  Rep.  62;  Pearce  v.  Suther- 
land, 3  Alaska  303. 

Idaho. — California,  etc.,  Min.  Co. 
v.  Manley,  10  Idaho,  786,  81  Pac.  50, 
appeal  dismissed  for  want  of  juris- 
diction, 203  U.  S.  579,  51  L.  Ed.  326, 
27  Sup.  Ct.  779. 

Iowa. — Bobzin  v.  Gould  Balance 
Valve  Co.,  140  Iowa  744,  118  N.  W. 
40. 

Pennsylvania. — Girard  v.  Case 
Bros.  Cutlery  Co.,  225  Pa.  327,  329, 
74  Atl.  201. 

South  Dakota. — Huron  Printing 
A  Bindery  Co.  v.  Kittleson,  4  S.  D. 
520,  57  N.  W.  233 ;  Chase  v.  Redfield 
Creamery  Co.,  12  S.  D.  529,  81  N.  W. 
951. 

Texas. — Woodward  v.  San  An- 
tonio Traction  Co.,  95  S.  W.  76,  cit- 
ing Clark  &  Marshall  on  Private  Cor- 
porations, §  724. 

Wyoming. — Grand  Rapids  Fur- 
niture Co.  v.  Grand  H.  &  O.  H.  Co., 
11  Wyo.  128,  70  Pac.  838,  72  Pac. 
687. 

United  Kingdom  and  Colonies. — 
Re  Slobodinsky,  1903,  2  K.  B.  517. 

Some  authorities  hold  that  where 
the  promoter  has  a  personal  inter- 
est in  that  he  is  attempting  to 
shift  to  the  corporation  his  respon- 
sibility for  the  performance  of  a 
contract  made  by  him  as  promoter, 
his  knowledge  is  not  notice  to  the 
corporation.  Weatherford  M.  W.  & 
N.  W.  Ry.  Co.  v.  Granger,  86  Tex. 
350,  358,  24  S.  W.  795,  798,  40  Am. 
St.  Rep.  837;  Jones  v.  Smith, 
(Tex.),  87  S.  W.  210,  212,  and  see 


Ropes  v.  Nilan,  44  Mont.  238,  119 
Pac.  479. 

Other  authorities  hold  that  the 
personal  interest  of  the  promoter 
is  immaterial;  that  he  may,  as  an 
officer  of  the  corporation,  act  for  it 
in  assuming  responsibility  for  the 
performance  of  a  contract  made  by 
him  as  promoter,  and  '  that  the 
knowledge  acquired  by  him  as  pro- 
moter is  notice  to  the  corporation. 
Mesinger  v.  Mesinger  Bicycle  Sad- 
dle Co.,  44  N.  Y.  App.  Div.  26,  60 
Supp.  431 ;  Oakes  v.  Cattaraugus 
Water  Co.,  143  N.  Y.  430,  38  N.  E. 
461,  62  St.  Rep.  445,  26  L.  R.  A.  544, 
(two  judges  dissenting)  ;  Girard  v. 
Case  Bros.  Cutlery  Co.,  225  Pa.  327, 
74  Atl.  201;  Chase  v.  Redfield 
Creamery  Co.,  12  S.  D.  529,  81  N. 
W.  951,  and  see  ante,  §  53. 

The  promoter's  knowledge  cannot 
be  charged  to  the  corporation,  if  he 
is,  while  an  officer  of  the  corpora- 
tion, also  acting  for  the  other  party 
to  the  transaction.  Rockport  Coal 
Co.  v.  Carter,  157  Ky.  555,  163  S. 
W.  734.  Cf.  §  53,  ante. 

The  mere  fact  that  the  promoter 
afterwards  became  an  officer  of  the 
company  would  not  charge  it  with 
notice  of  all  facts  of  which  he  had 
knowledge,  as  it  cannot  be  pre- 
sumed that  he  communicated  any 
fact  to  the  company  unless  he 
acted  for  it  in  relation  thereto  or  it 
in  some  way  became  his  duty  to 
notify  the  corporation.  See  The 
Admiral,  1  Fed.  Gas.  179,  8  Monthly 
Law  Rep.  N.  S.  91;  Sullivan  v.  De- 
troit Y.  &  A.  A.  R.  Co.,  135  Mich. 


128 


THE  LAW  OF  PROMOTERS. 


to  the  agent  is  notice  to  the  principal,  if  the  facts  were  present 
in  the  agent's  mind  when  acting  for  the  principal,  though  the  no- 
tice was  given  before  the  commencement  of  the  agency.8  Some 
jurisdictions,  however,  follow  a  rule  that,  to  visit  the  principal 
with  constructive  notice,  it  is  necessary  that  the  knowledge  of  the 
agent  should  have  been  acquired  in  the  course  of  his  employment.9 


661,  98  N.  W.  756,  64  L.  R.  A.  673, 
106  Am.  St.  Rep.  403.  And  see  Red 
River  Valley  Land  &  5nv.  Co.  v. 
Smith,  7  N.  D.  236,  74  N.  W.  194. 
Cf.  Girard  v.  Case  Bros.  Cutlery 
Co.,  note  11,  infra. 

8.  Some  of  the  jurisdictions 
which  apply  this  rule  are: 

Federal.— The  Distilled  Spirits, 
11  Wall.  356,  20  L.  Ed.  167;  Davis 
Imp.  Wrought  Iron  W.  W.  Co.  v. 
Davis  Wrought  Iron  W.  Co.,  20 
Fed.  Rep.  699. 

Colorado. — C  ampbell  v.  First 
Natl.  Bank  of  Denver,  22  Colo.  177, 
43  Pac.  1007. 

Connecticut. — Farmers  &  Citi- 
zens' Bank  v.  Payne,  25  Conn.  444, 
68  Am.  Dec.  362. 

Georgia. — Whitten  v.  Jenkins,  34 
Ga.  297. 

Illinois. — Snyder  v.  Partridge, 
138  111.  173,  184-185,  29  N.  E.  851, 
32  Am.  St.  Rep.  130. 

Louisiana. — Cummings  v.  Harsa- 
brauch,  14  La.  Ann.  711. 

Maine. — Fairfield  Savings  Bank 
v.  Chase,  72  Me.  226,  39  Am.  Rep. 
319. 

Massachusetts. — National  Secur- 
ity Bank  v.  Cushman,  121  Mass. 
490. 

New  Hampshire. — Hovey  v.  Blan- 
chard,  13  N.  H.  145. 

New  York. — Constant  v.  Univers- 


ity of  Rochester,  111  N.  Y.  604,  19 
N.  E.  631,  2  L.  R.  A.  734,  7  Am.  St. 
Rep.  769 ;  Slattery  v.  Schwannecke, 
118  N  Y.  543,  23  Tg.  E.  922;  Denton 
v.  Ontario  County  Natl.  Bank,  150 
N.  Y.  126,  137,  44  N.  E.  781;  Mc- 
Cutcheon  v.  Dittman,  164  N.  Y. 
355,  58  N.  E.  97;  Mathews  v. 
Damainville,  100  App.  Div.  311,  91 
Supp.  524. 

North  Dakota. — Red  River  Val- 
ley Land  &  Inv.  Co.  v.  Smith,  7  N. 
D.  236,  74  N.  W.  194. 

Tennessee. — Union  Bank  v.  Camp- 
bell, 4  Humph.  394. 

Vermont. — Hart  v.  Bank,  33  Vt. 
252. 

United  Kingdom  and  Colonies. — 
Dresser  v.  Norwood,  17  Com.  Bench, 
N.  S.  466. 

9.  Some  of  the  jurisdictions 
which  apply  this  rule  are: 

Kentucky. — Willis  v.  Vallette,  4 
Mete.  186. 

Maryland. — The  General  Ins.  Co. 
v.  The  U.  S.  Ins.  Co.,  10  Md.  517, 
69  Am.  Dec.  174. 

Michigan. — Warner  v.  Hall,  53 
Mich.  371,  19  N.  W.  40. 

Missouri. — Ford  v.  French,  72 
Mo.  250. 

Pennsylvania. — G  ilkeson  v. 
Thompson,  210  Pa.  355,  359,  59  Atl. 
1114;  Houseman  v.  Girard  Mutual 
Bldg.  &  Loan  Assn.,  81  Pa.  256. 


PROMOTERS'  CONTRACTS.  129 

One  might  well  expect  that  it  would  in  such  jurisdictions  be  held 
that  knowledge  acquired  by  a  promoter  before  the  organization 
of  the  corporation,  cannot  be  attributed  to  the  corporation  be- 
cause the  promoter  afterwards  became  one  of  its  directors  or 
officers  and  acted  for  the  corporation  with  the  facts  in  mind.  In 
Pennsylvania,  however,  where  the  rule  is  strictly  adhered  to 
that  the  principal  is  only  chargeable  with  notice  of  such  matters 
as  come  to  the  knowledge  of  the  agent  in  the  course  of  his 
agency,10  it  is  held  that  "  the  knowledge  of  the  principal  pro- 
moters of  a  corporation,  who  acquire  their  knowledge  as  such 
promoters,  and  who  on  the  organization  become  officers  and  di- 
rectors, is  the  knowledge  of  the  corporation."  n 

§  72.  Admissions  of  promoter. 

The  admissions  made  by  the  promoters  are  not  ordinarily  bind- 
ing on  the  corporation  or  admissible  in  evidence  against  it 12  but 
it  has  been  said  that  "  where  a  corporation  adopts  and  acts  on 
the  negotiations  and  inchoate  contracts  of  the  promoters  who 
formed  it,  their  acts  and  declarations,  so  far  as  they  would 
have  been  competent  against  themselves,  are  competent  against 
the  corporation."  13 


But  as  to  promoters,  see  Girard  v.  11.  Girard  v.  Case  Bros.  Cutlery 

Case  Bros.  Cutlery  Co.,  225  Pa.  327,  Co.,  225  Pa.  327,  329,  74  Atl.  201. 

74  Atl.  201.  Cf.  note  7,  supra. 

South     Carolina. — Steinmeyer     v.  12.  McCallum    v.    Purssell    Mfg. 

Steinmeyer,  55  S.  C.  9,  33  S.  E.  15.  Co.,    1    N.    Y.    Supp.    428,    and    see 

Texas. — Lane  v.  DeBode,  29  Tex.  Nahoum    v.    Marcoglou   &   Co.,    146 

Civ.     App.     602,     69     S.     W.     437;  N.  Y.  Supp.  1063. 

Cooper,  et  al  v.  Ford,  29  Tex.  Civ.  13.  Abbott's    Trial    Evidence,    p. 

App.  253,  69  S.  W.  487;  Teagarden  45,    §   52;    (2nd.   ed.,   p.   56,   §   52), 

.v.  Godley  Lumber  Co.,  105  Tex.  616,  Quoted   in   Raegener   v.    Brockway, 

154   S.  W.  973.  58  N.  Y.  App.  Div.  166,  171,  68  Supp. 

10.  Houseman   v.   Girard   Mutual  712,  aff'd,  171  N.  Y.  629,  63  N.  E. 

Banking,    etc.,    Asso.,    81    Pa.    256;  1121. 
Gilkeson  v.  Thompson,  210  Pa.  355, 
359,  59  Atl.  1114,  and  cases  cited. 


130 


THE  LAW  OF  PROMOTERS. 


§  73.  Enforcement  by  the   corporation   of   contract  made   by 

the  promoter. 

A  contract  made  by  the  promoters  on  behalf  of  a  projected 
corporation  may,  after  the  corporation  has  been  organized  and 
the  obligations  of  the  contract  assumed,  be  enforced  at  the  suit 
of  the  corporation.14 


14.  Federal. — Cook  v.  Sterling 
Electric  Co.,  150  Fed.  Rep.  766,  80 
C.  C.  A.  502. 

California. — Scadden  Flat  Gold 
Min.  Co.  v.  Scadden,  121  Cal.  33, 

53  Pac.  440. 

Idaho. — Henry  Gold  Min.  Co.  v. 
Henry,  25  Idaho  333,  137  Pac.  523; 
Olympia  Min.  &  Mill.  Co.  v.  Kerns, 
24  Idaho  481,  135  Pac.  255. 

Indiana. — Smith  v.  Parker,  148 
Ind.  127,  45  N.  E.  770. 

Minnesota. — Crow  River  Valley 
Creamery  Co.  v.  Strande,  104  Minn. 
46,  115  N.  W.  1038. 

Missouri. — Richard  Brown  &  Son 
Co.  v.  Bambrick  Bros.  Const.  Co., 
150  Mo.  App.  505,  131  S.  W.  134. 

New  York. — Cummings  v.  Brown, 
122  App.  Div.  505,  107  Supp.  498. 

Oregon. — See  dissenting  opinion 
of  Watson,  C.  J.  in  Kelly  v.  Ruble, 
11  Or.  75,  103,  4  Pac.  593. 

Pennsylvania. — Snow  v.  Thomp- 
son Oil  Co.,  59  Pa.  209. 

Texas. — Bonham  Cotton  Com- 
press Co.  v.  McKellar,  86  Tex.  694, 
26  S.  W.  1056. 

West  Virginia. — Gas  Co.  v.  Elder, 

54  W.  Va.  335,  46  S.  E.  357. 
United  Kingdom  and  Colonies. — 

Bedford    &   Cambridge   Ry.    Co.    v. 
Stanley,  2  Johns  &  H.  746. 

Note  to  Oakes  v.  Gattaraugus 
Water  Co.,  26  L.  R.  A.  544,  551. 


Cf.  Star  Corn  Millers  Soc.  v. 
Moore,  81  L.  T.  171;  also  Florida 
Coca  Cola  Bottling  Co.  v.  Ricker, 
136  Ga.  411,  71  S.  E.  734. 

The  corporation  cannot  compel 
performance  unless  it  is  organized 
within  a  reasonable  time.  Olympia 
Min.  &  Mill  Co.  v.  Kerns,  24  Idaho 
481,  135  Pac.  255. 

Specific  performance  has  been  re- 
fused on  the  ground  that  the  plain- 
tiff corporation '  was  not  organized 
in  the  state  contemplated  by  the 
agreement.  Olympia  Min.  Co.  v. 
Kerns,  13  Idaho  514,  91  Pac.  92; 
same  v.  same,  15  Idaho,  371,  97 
Pac.  1031.  Cf.  §  17,  ante. 

A  cause  of  action  against  an 
agent  of  the  promoters  for  a  breach, 
before  the  corporation  came  into 
existence,  of  his  contract  with  the 
promoters  does  not  pass  to  the  cor- 
poration in  the  absence  of  an  as- 
signment. Swarthmore  Lumber 
Co.  v.  Parks,  72  W.  Va.  625,  79  S. 
E.  723. 

The  corporation  may  enforce  sub- 
scriptions obtained  by  the  pro- 
moters before  its  organization. 

California. — Mahan  v.  Wood,  44 
Cal.  462;  Western  Development  Co. 
v.  Emery,  61  Cal.  611 ;  Marysville 
Electric,  etc.,  Co.  v.  Johnson,  93 
Cal.  538,  29  Pac.  126,  27  Am.  St.  R. 
215,  109  Cal.  192,  195,  41  Pac.  1016, 


PROMOTERS'  CONTRACTS. 


131 


After  the  promoters'  contract  has  been  adopted  by  the  corpo- 
ration,  or,  more  properly   speaking,   after  the   corporation  has 


50  Am.  St.  Rep.  34;  Kohler  v. 
Agassiz,  99  Cal.  9,  15,  33  Pac.  741; 
San  Joaquin  Land  &  Water  Co.  v. 
Beecher,  101  Cal.  70,  35  Pac.  349; 
Horseshoe  Pier,  etc.,  Co.  v.  Sibley, 
157  Cal.  442,  447,  108  Pac.  308. 

District  of  Columbia. — Glenn  v. 
Bussy,  16  Dist.  of  Col.  (5  Mackey) 
233. 

Illinois. — Johnston  v.  The  Ewing 
Female  University,  35  111.  518; 
Cross  v.  Pinckneyville  Mill  Co.,  17 
111.  54;  Richelieu  Hotel  Co.  v.  In- 
ternational Military  Enc.  Co.,  140 
111.  248,  29  N.  E.  1044,  33  Am.  St. 
Rep.  234;  Tonica  &  P.  R.  R.  Co. 
v.  McNeely,  21  111.  71;  Stone  v. 
Great  Western  Oil  Co.,  41  111.  85. 

Iowa. — Nulton  v.  Clayton,  54 
Iowa  425,  6  N.  W.  685,  37  Am.  St. 
R.  213. 

Kentucky. — Anderson  v.  West 
Kentucky  College,  10  Ky.  Law  Rep. 
725. 

Maine. — Penobscot  R.  R.  Co.  v. 
Dummer,  40  Me.  172,  63  Am.  Dec. 
654;  Kennebec  &  Portland  R.  R. 
Co.  v.  Palmer,  34  Me.  366. 

Massachusetts. — Athol  Music  Hall 
Co.  v.  Carey,  116  Mass.  471 ;  People's 
Ferry  Co.  v.  Balch,  8  Gray  303,  311. 

Michigan. — Peninsular  Ry.  Co.  v. 
Duncan,  28  Mich.  130;  Michigan 
Midland  &  Can.  R.  R.  Co.  v.  Bacon, 
83  Mich.  466. 

Minnesota. — Red  Wing  Hotel  Co. 
v.  Friedrich,  26  Minn.  112,  1  N.  W. 
827. 

Missouri.— Haskell  v.  Sells,  14 
Mo.  App.  91,  101. 


Nebraska. — Nebraska  Chicory  Co. 
v.  Lednicky,  79  Neb.  587,  113  N. 
W.  245. 

New  Hampshire. — Ashuelot  Boot 
&  Shoe  Co.  v.  Hoit,  56  N.  H.  548. 

New  York. — Lake  Ontario  Au- 
burn &  N.  Y.  R.  R.  Co.  v.  Mason, 
16  N.  Y.  451;  Federal  Sanitary 
Clearing  &  Refining  Co.  v.  Loeb,  147 
App.  Div.  737,  132  Supp.  65;  Non- 
Electric  Fibre  Mfg.  Co.  v.  Peabody, 
21  App.  Div.  247,  47  Supp.  677; 
Woods  Motor  Vehicle  Co.  v.  Brady, 
181  N.  Y.  145,  73  N.  E.  674,  (re- 
argument  denied,  181  N.  Y.  554,  74 
N.  E.  1128),  reversing,  90  App.  Div. 
610,  85  Supp.  1151,  which  affirmed, 
39  Misc.  79,  78  Supp.  203. 

Pennsylvania. — Arnold  M.  E.  Co. 
v.  Chew,  21  Pa.  Super.  Ct.  407; 
Jeannette  Bottle  Works  v.  Schall, 
13  Pa.  Super.  Ct.  96,  and  cases  cited. 

Cf.  Philadelphia  Medical  Pub.  Co. 
v.  Wolf  enden,  248  Pa.  450, 94  Atl.  138, 
where  it  was  held  that  defendant's 
agreement  was  with  the  promoter 
personally,  and  not  a  subscription 
to  the  shares  of  the  corporation. 

Tennessee. — Gleaves  v.  Brick 
Church  Turnpike  Co.,  1  Sneed  491. 

Texas. — McCord  v.  Southwestern 
Sundries  Co.  —  Tex.  Civ.  App.  — , 
158  S.  W.  226. 

Virginia. — Newberry  Land  Co.  v. 
Newberry,  95  Va.  Ill,  27  S.  E.  897, 
(dictum). 

West  Virginia. — Clarksburg,  etc., 
Land  Co.  v.  Davis,  —  W.  Va.  — ,  86 
S.  E.  928. 


132 


THE  LAW  OF  PROMOTERS. 


agreed  that  the  terms  of  the  promoters'  contract  shall  be  binding 
upon  it,  no  action  for  the  breach  of  the  contract  can  be  main- 
tained by  the  promoters,  as  their  contract  has  been  superseded  by 
that  of  the  corporation.15 


See  note  to  Winston  v.  Brooks,  4 
L.  R.  A.  507. 

And  see  ante,  §  52. 

It  has  been  held  that  if  the  sub- 
scription agreement  contemplated 
payment  to  a  contractor,  and  not  to 
the  corporation,  the  latter  cannot 
sue  thereon.  Dotson  v.  Savannah 
Pure  Food  Canning  Co.,  140  Ga.  161, 

78  S.  E.  801. 

Some  authorities  hold  that  a  mere 
agreement  between  the  parties  that 
they  will  subscribe  for  shares  of  a 
corporation  when  the  same  is 
formed,  is  not  enforceable  by  the 
corporation ;  that  the  agreement  is 
enforceable  by  the  corporation  only 
if  some  party  thereto  therein  agrees 
to  form  the  corporation. 

California. — California  Sugar 
Manufacturing  Co.  v.  Schafer,  57 
Cal.  396. 

Kentucky. — Twin  Creek,  etc., 
Turnpike  Road  Co.  v.  Lancaster, 

79  Ky.  552. 

New  York. — Avon  Springs  Sani- 
tarium Co.  v.  Weed,  189  N.  Y.  557, 
82  N.  E.  1123,  (reargument  denied, 
190  N.  Y.  521,  83  N.  E.  1122),  re- 
versing, 119  App.  Div.  560,  104 
Supp.  58;  Yonkers  Gazette  Co.  v. 
Taylor,  30  App.  Div.  334,  51  Supp. 
969,  5  Ann.  Cas.  384;  Lake  Ontario 
Shore  R.  R.  Co.  v.  Curtiss,  80  N.  Y. 
219. 

Ohio. — Dayton  W.  V.  &  X.  T.  Co. 
v.  Coy,  13  Ohio  St.  84. 

Pennsylvania. — Strasburg    R.     E. 


Co.  v.  Echternacht,  21  Pa.  220,  60 
Am.  Dec.  49. 

A  mere  agreement  to  subscribe 
for  shares  is,  however,  enforceable 
by  the  corporation,  against  a  signer 
who  subsequently  ^accepted  his 
shares.  Avon  'Springs  Sanitarium 
Co.  v.  Kellogg,  125  N.  Y.  App.  Div. 
51,  109  Supp.  153,  affirmed,  sub  nom. 
Smith  v.  Kellogg,  194  N.  Y.  567,  88 
N.  E.  1132. 

It  has  been  held  that  if  the  de- 
fendant has  not  formally  subscribed 
for  shares,  but  merely  agreed  to  sub- 
scribe for  shares,  the  corporation 
cannot  sue  him  for  the  subscription 
price,  its  remedy  being  an  action 
for  damages.  Thrasher  v.  Pike 
County  R.  R.  Co.,  25  111.  393;  Mt. 
Sterling  Coalroad  Co.  v.  Little,  14 
Bush  (Ky.)  429. 

15.  Wiley  v.  Borough  of  To- 
wanda,  26  Fed.  Rep.  594;  Smith  v. 
Parker,  148  Ind.  127,  45  N.  E.  770; 
Norcross,  etc.,  Co.  v.  Summerour, 
114  Ga.  156,  39  S.  E.  870.  But  see 
McCausland  v.  Hill,  23  Ont.  App. 
Rep.  738,  also  Watson  v.  Gugino,  140 
N.  Y.  App.  Div.  33,  124  Supp.  321, 
questioned  (but  reversed  on  other 
grounds),  204  N.  Y.  535,  98  N.  E. 
18,  39  L.  R.  A.  N.  S.  1090,  Am.  & 
Eng.  Ann.  Cas.  1913.  D.  215. 

After  the  promoters'  rights  under 
a  contract  have  passed  to  the  cor- 
poration, it  is  improper  to  join 
them  with  the  corporation  as  plain- 
tiffs in  an  action  thereon.  Lott- 


PROMOTERS'  CONTRACTS.  133 

As  the  promoters  have  no  power  to  contract  for  the  corporation, 
a  suit  arising  out  of  the  breach  of  a  contract  made  by  the  pro- 
moters cannot  be  maintained  by  the  corporation  unless  there  is 
shown,  some  act  on  the  part  of  the  fully  organized  company  from 
which  its  agreement  to  be  bound  by  the  terms  of  the  promoters' 
contract  can  at  least  be  implied.  The  mere  commencement  of  the 
action  is  insufficient.  Some  prior  act  of  assumption  must  be 
shown.16 

In  order  that  the  corporation  may  maintain  a  suit  for  the 
breach  of  the  terms  of  a  contract  made  for  it  by  its  promoters,  it 
must  appear  that  the  corporation,  before  the  other  party  gave 
notice  of  his  withdrawal,  acted  upon  the  promoters'  contract  and 
agreed  to  be  bound  by  its  terms.  The  corporation  cannot,  ac- 
cording to  the  weight  of  authority,  "  ratify  "  or  "  adopt  "  a  con- 
tract made  for  it  by  its  promoters,  and  it  acquires  no  rights  there- 
under unless  it  can  show  a  new  contract,  express  or  implied,  the 
terms  of  which  may  be  sought  in  the  agreement  made  by  the  pro- 
moters.17 An  agreement  made  with  the  promoters  of  a  projected 
corporation  is  ordinarily  nothing  more  than  an  agreement  to  enter 
upon  a  contract  with  the  corporation  when  organized.  If  the 
other  party  refuses  to  contract  with  the  corporation  he  may  be- 
come liable  to  the  promoters  because  of  the  breach  of  his  contract 

man,    etc.,    Co.    v.    Houston    Water  654,    2     Supp.    457 ;     Raegener    v. 

Works  Co.   (Tex.),  38  S.  W.  357.  Brockway,  58  N.  Y.  App.  Div.  166, 

It  is  unnecessary  to  join  the  pro-  170,  68  Supp.  712,  affirmed,  171  N. 

moters  as  defendants,  Federal  Sani-  Y.  629,  63  N.  E.  1121,  (citing  Thomp- 

tary  &  Refining  Co.  v.  Loeb,  3  New  son  on  Corporations,  §  482)  ;  Tinne- 

York  Current  Decisions  78.  velly  Sugar  Ref.  Co.,  Ltd.,  v.  Mirr- 

16.  Penn  Match  Co.  v.  Hapgood,  lees,  etc.,  Co.,  Ltd.,  Sessions  Cases, 

141  Mass.  145,  149,  7  N.  E.  22;  Es-  21  Rettie  1009. 

sex    Turnpike    Corp.    v.    Collins,    8  Cf.    Chas.    F.    Hollwedel    Co.    v. 

Mass.    292;    Montgomery    v.    Whit-  Auerbach  &  Co.,  67  N.  Y.  Misc.  148, 

beck,  12  N.  D.  385,  96  N.  W.  327;  121  Supp.  597. 

Matter  of  Rochester  H.  &  L.  R.  R.  And   see   the  Tennessee  Code  of 

Co.,  50  Hun   (N.  Y.)   29,  18  St.  R.  1896,   §   2036. 

17.  See  ante,  §  50. 


134  THE  LAW  OF  PROMOTERS. 

with  them,18  but  the  only  complaint  of  the  corporation  is  that  the 
other  party  refused  to  enter  upon  a  contract  with  it,  and  no  cause 
of  action  accrues  to  it  therefrom.19 

If  the  promoters  insert  in  the  contract  made  by  them  for  the 
projected  corporation,  a  provision  that  they  shall  in  no  event 
be  personally  liable  thereunder,  their  contract  is,  in  the  absence 
of  an  independent  consideration,  void  for  lack  of  mutuality  and 
not  enforceable  by  either  the  corporation  or  the  promoters. 

It  is  held  in  Kline  Bros.  &  Co.  v.  Royal  Insurance  Co.20  that  an 
insurance  policy  taken  out  by  the  promoters  in  the"  name  of  the 
company,  inures  to  the  benefit  of  the  fully  organized  corporation 
upon  acceptance  by  it,  provided  that  such  acceptance  takes  place 
before  a  loss  occurs. 

It  has  been  held  that  a  check  given  to  the  promoters  as  a  de- 
posit upon  a  subscription  to  the  shares  of  a  company  to  be  formed, 
may  after  its  organization  be  sued  upon  by  the  corporation.21 

It  was  held  in  Newberry  Land  Co.  v.  Newberry  22  that  the  sale 
by  the  promoters  to  the  corporation,  of  lands  contracted  for  by 
the  former  in  their  individual  capacity,  did  not  enable  the  corpo- 
ration on  failure  of  title  to  recover  from  the  vendor  the  sums  paid 
on  the  contract  by  the  promoters,  as  the  contract  had  not  been 
assigned  to  the  corporation ;  that  the  right  of  recovery  remained 
in  the  promoters,  and  that  the  corporation  must  look  to  them  for 
relief. 

In  Jenkins  v.  Bradley,23  the  promoters  were  tenants  in  common 
of  certain  property  to  be  sold  to  the  corporation.  There  was  a 
question  as  to  the  validity  of  the  title  to  one  of  the  undivided  in- 
terests. The  other  promoters  agreed  with  the  apparent  owner  of 

18.  See  post,  §  79.  21.  Syracuse,   etc.,    R.   R.   Co.   v. 

19.  Natal    Land    Co.    v     Pauline  Gere,  4  Hun  (N.  Y.)  392,  6  T.  &  C. 
Colliery   Synd.  1904,  App.  Gas.  120.  636;    Vermont   Cent.    R.    R.    Co.    v. 

20.  192  Fed.  Rep.  378.     Reversed  Clayes,  21  Vt.  30. 

on  another  ground,  (««&  nom.  Royal          22.  95  Va.  Ill,  27  S.  E.  897. 
Ins.    Co.    v.    Kline    Bros.    &    Co.),          23.  104  Wis.  540,  80  N.  W.  1025. 
198  Fed.  Rep.  468,  117  C.  C.  A.  228. 


PROMOTERS'  CONTRACTS.  135 

the  doubtful  title  that  they  would  indemnify  both  him  and  the 
corporation  against  any  failure  of  title.  The  court  held  that  this 
agreement  did  not  inure  to  the  benefit  of  the  corporation. 

In  Hillside  Cemetery  Association  v.  Holmes,24  a  corporation 
was  allowed  to  maintain  an  action  for  the  cancellation  of  certain 
of  its  shares,  because  of  the  failure  of  the  consideration  for  their 
issue  agreed  upon  by  the  promoters. 

§  74.  Right  of  corporation  to  conveyance  of  property  purchased 

for  it  by  promoter. 

Whether  a  corporation  can.  compel  its  promoters  to  convey  to 
it  property  which  they  purchased  for  it  before  its  organization, 
is  a  question  upon  which  the  cases  are  not  in  accord.  Some  au- 
thorities hold  that  while  the  corporation  is  not  bound  by  the 
promoters'  contracts,  it  can  after  it  has  been  fully  organized, 
incur  the  obligations  and  assume  the  benefits  thereof  and  compel 
the  promoters  to  convey  to  it  the  property  purchased  for  it  be- 
fore its  organization,25  particularly  if  it  acts  before  any  with- 
drawal or  disavowal  on  the  part  of  the  promoters.26  Other  au- 
thorities hold  that  a  mere  intention  on  the  part  of  the  promoters 
that  their  purchase  is  made  for  a  corporation  to  be  formed,  does 
not  subject  the  property  to  any  trust  and  that  the  promoters  are 

24.  97  Minn.  261,  105  N   W.  905.  Instalments  of  stock  subscriptions 

25.  Seacoast  R.  R.  Co.  v.  Wood,  paid    to    the    promoters    must,    of 
65   N.    J.    Equity   530,   537-539;    56  course,  be  accounted  for  to  the  cor- 
Atl.  337;  affirmed,  su  6  nom.  Atlantic  poration.      San    Joaquin    L.    &    W. 
City  R.  R.  Co.  v.  Wood,  78  N.  J.  Eq.  Co.   v.   West,   94   Cal.   399,  29   Pac. 
298,    81    Atl.    1132;    Central    Trust  785. 

Co.  of  Pittsburg  v.  Lappe,  216  Pa.  26.  Central    Trust    Co.    of    Pitts- 

549,  65  Atl.  1111.     See  also  Nester  burg  v.  Lappe,  216  Pa.  549,  65  Atl. 

v.  Gross,  66  Minn.  371,  69  N.  W.  39.  1111. 

In  the  case  last  cited  the  retention  If  the  company  at  first  refuses  to 
of  the  property  by  the  promoter  was  take  the  property  from  the  promoter 
under  the  additional  facts  a  gross  it  cannot  afterwards  compel  a  con- 
fraud  upon  the  corporation.  veyance.  Sandy  River  R.  R.  v. 

Stubbs,  77  Me.  594,  2  Atl.  9. 


136 


THE  LAW  OF  PROMOTERS. 


at  liberty  to  change  their  minds  and  make  whatever  disposition  of 
the  property  that  they  see  fit.27 

The  power  of  the  corporation  to  compel  a  conveyance  is  un- 
questionable if  the  conveyance  to  the  promoters  was  made  upon 
an  express  trust  to  convey  to  -the  corporation  when  formed.28 
The  equitable  title,  in  such  case,  vests  in  the  corporation  immedi- 
ately upon  its  organization.29 

§  75.  Effect   of   instrument  naming   projected   corporation   as 

grantee. 

It  frequently  happens  that  a  deed,  bill  of  sale,  or  assignment 
running  directly  to  the  projected  corporation  is,  before  its  organ- 
ization, delivered  to  the  promoters.  The  effect  of  such  an  instru- 
ment is  by  no  means  free  from  doubt.  It  has  been  held  that  such 
an  instrument  passes  no  title,30  but  there  are  other  cases  which 
hold  that  it  takes  effect  upon  the  organization  of  the  company.31 


27.  Camden   Land   Co.   v.   Lewis, 
101   Me.   78;   63   Atl.   523,   and   see 
Tyrrell  v.  Bank  of  London,  10  H.  L. 
Cas.  26,  52,  11  Eng.  Rep.  934. 

In  the  case  first  cited  the  purchase 
was  made  by  the  president  of  the 
corporation  and  the  court  made  the 
point  that  even  though  the  presi- 
dent had  orally  agreed  with  the 
corporation  to  make  the  purchase 
for  it,  the  statute  of  frauds  would 
have  rendered  this  promise  unen- 
forceable ;  citing  15  Am.  &  Eng.  Enc. 
of  Law  (2nd  Ed.)  1187. 

Cf.  Averill  v.  Barber,  25  N.  Y.  St. 
Rep.  194,  198,  et  seq.,  6  Supp.  255,  2 
Silv.  40,  53  Hun  636. 

28.  McCandless    v.    Inland    Acid 
Co.,  115  Ga.  968,  42  S.  E.  449 ;  Olym- 
pia  Min.   &  Mill.  Co.  v.   Kerns,  24 
Idaho,  481,  135  Pac.  255 ;  Hecla  Con- 
soL  Gold  Min.  Co.  v.  O'Neill,  47  N. 


T.  St.  Rep.  211,  19  Supp.  592; 
Church  of  St.  Stanislaus  v.  Alge- 
meine  Verein,  31  N.  Y.  App.  Div. 
133,  52  Supp.  922,  affirmed,  164  N. 
Y.  606,  58  N.  E.  1086.  And  see 
Coyote  G.  &  S.  M.  Co.  v.  Ruble,  S 
Or.  284,  299,  but  compare  Kelly  v. 
Ruble,  11  Or.  75,  104-105,  4  Pac. 
593,  (dissenting  opinion  of  Watson 
C.  J.). 

29.  McCandless    v.    Inland    Acid 
Co.,  115  Ga.  968,  42  S.  E.  449. 

30.  Wall  v.  Mines,  130  Cal.  27,  43, 
62   Pac.   386;    Globe  Realty  Co.   v. 
Whitney,     106     La.     257,     30     So. 
745 ;  Whiting  &  Sons  Co.  v.  Barton, 
204  Mass.  169,  90  N.  E.  528. 

31.  Sumter    Tobacco    Warehouse 
Co.  v.  Phrenix  Ass.  Co.,  76  S.  C.  76, 
56  S.  E.  654,  121  Am.  St.  Rep.  941, 
10  L.  R.  A.  N.  S.  736,  11  Am.  &  Eng. 
Ann.  Oas.  780,   (citing  4  Thompson 


PROMOTERS'  CONTRACTS. 


137 


If  the  corporation  is  never  organized  the  deed  is  void32  and  a 
suit  in  equity  to  cancel  it  as  a  cloud  upon  title  may  be  main- 
tained.33 

The  fact  that  the  deed  bears  date,  and  was  executed,  at  a  time 
when  the  company  was  not  yet  organized,  is  immaterial  if  delivery 
is  made  after  its  organization,34  and  even  if  delivery  is  made  be- 


on  Corporations,  5114,  5115)  ;  Hecht 
v.  Acme  Coal  Co.,  19  Wyo.  10,  113 
Pac.  786. 

This  question  is  in  Tennessee  con- 
trolled by  statute  (Code  of  1896, 
|  2036).  See  Cumberland  Land  Co. 
v.  Daniel  (Tenn.),  52  S.  W.  446. 

As  to  grants  of  land  by  the  state 
for  public  use,  see  Trustees  of  Vin- 
cennes  Univ.  v.  Indiana,  14  How. 
(U.  S.)  268,  274,  14  L.  Ed.  416; 
Dartmouth  College  v.  Woodward,  4 
Wheat.  (U.  S.)  518,  690,  et  seq.,  4 
L.  Ed.  629. 

As  to  ordinances  granting  fran- 
chises to  corporations,  before  organ- 
ization, see  Spring  Valley  Water 
Works  v.  San  Francisco,  22  Cal.  434 ; 
Aspen  Water  &  Light  Co.  v.  Aspen, 
5  Colo.  App.  12,  37  Pac.  728;  Chi- 
cago Tel.  Co.  v.  Northwestern  Tel. 
Co.,  199  111.  324,  346,  65  N.  E.  329, 
affirming,  100  111.  App.  57,  62-63 ;  Mc- 
Wethy  v.  Aurora  Elec.  Light  Co.,  202 
111.  218,  228-229,  67  N.  E.  9 ;  Stevens 
v.  Borough  of  Merchantville,  62  N. 
J.  Law  167,  40  Atl.  688;  Lake  v. 
Ocean  City,  etc.,  Co.,  62  N.  J.  Law 
160,  41  Atl.  427;  Clarksburg  Elec. 
Light  Co.  v.  City  of  Clarksburg,  47 
W.  Va.  739,  749-750,  35  S.  E.  994, 
50  L.  R.  A.  142,  152. 

And  see  cases  cited,  American  Di- 
gest, Decennial  Edition,  "Muni- 
cipal Corporations,"  §  111  (1). 


As  to  the  rights  of  a  railroad  cor- 
poration under  surveys  made  by  its 
promoters,  see  Washington,  etc.,  R. 
R.  Co.  v.  Coeur  D'Alene  Ry.  &  Nav. 
Co.,  160  U.  S.  77,  99,  16  Sup.  Ct. 
231,  40  L.  Ed.  355;  New  Brighton, 
etc.,  R.  R.  Co.  v.  Pittsburgh,  etc., 
R.  R.  Co.,  105  Pa.  13;  Homestead 
Street  Ry.  Co.  v.  Pittsburg  &  Home- 
stead Elec.  Street  R.  Co.,  166  Pa. 
162,  30  Atl.  950,  27  L.  R.  A.  383; 
Chesapeake  &  O.  Ry.  Co.  v.  Deep- 
water  Ry.  Co.,  57  W.  Va.  641,  667, 
50  S.  E.  890;  Milwaukee,  etc.,  Co. 
v.  Milwaukee  No.  Ry.,  132  Wis.  313, 
341,  112  N.  W.  663,  672. 

As  to  the  effect  of  the  promoters' 
surveys  and  contracts  upon  the 
power  of  other  railroads  to  take  a 
right  of  way  by  eminent  domain,  see 
Toledo  &  I.  Traction  Co.  v.  Toledo 
&  C.  Interurban  Ry.  Co.,  171 
Ind.  213,  86  N.  E.  54. 

32.  Wyckoff   v.    Vicary,   75   Hun 
(N.  Y.)  409,  56  St.  R.  774,  27  Supp. 
103;  Bogard  v.  Sweet,  17  Okla.  40, 
87  Pac.  669,  affirmed,  209  U.  S.  464, 
52  L.  Ed.  892,  28  Sup.  Ct.  595. 

33.  Bogard  v.  Sweet,  17  Okla.  40, 
87  Pac.  669,  affirmed,  209  U.  S.  464, 
52  L.  Ed.  892,  28  Sup.  Ct.  595. 

34.  San  Diego  Gas.  Co.  v.  Frame, 
137  Cal.  441,  446,  70  Pac.  295 ;  Dyer 
v.  Rich,  1  Mete.   (Mass.)   180,  190; 
Sayward  v.  Gardner,  5  Wash.  247, 


138  THE  LAW  OF  PROMOTERS. 

fore  that  time  a  redelivery  may  sometimes  be  inferred.35  A  de- 
livery to  the  promoter  in  escrow  for  the  projected  corporation 
has  been  held  valid  to  pass  title.36 

It  has  been  held  that  the  grantor  of  a  deed  naming  as  grantee 
a  corporation  afterwards  organized,  is  estopped  from  denying 
the  power  of  his  grantee  to  take  the  conveyance.37 

In  African  M.  E.  Church  v.  Conover,38  it  was  held  that  a  deed! 
to  a  voluntary  association  afterwards  incorporated,  left  the  title 
in  the  vendor  in  trust,  at  first  for  the  members  of  the  association, 
and  later  for  the  corporation. 

In  Smith  v.  First  National  Bank,39  it  was  held  that  a  deed  to 
a  corporation  not  yet  organized,  is  valid,  in  equity  at  least,  to 
pass  title  to  the  incorporators  individually. 

It  is  held  in  McCandless  v.  Inland  Acid  Co.40  that  a  deed  to 
certain  persons  as  directors  or  incorporators  does  not  pass  title 
to  the  corporation  upon  its  organization. 

A  deed  to  the  corporation  made  between  the  date  of  the  grant- 
ing of  the  charter  and  the  date  of  the  complete  organization  of 
the  company,  is  a  valid  deed  to  a  legally  existing  body.41 

31  Pac.  761,  33  Pac.  389,  and  see  Colo.  263,  268,  40  Pac.  457,  29  L. 
cases  cited  in  succeeding  notes.  R.  A.  143,  52  Am.  St.  R.  220. 

35.  Valk  v.  Crandall,  1  Sandf.  Ch.          38.  27  N.  J.  Eq.  157. 

(N.  Y.)   179,  182.     And  see  Charles  39.  43  Tex.  Civ.  App.  495,  504,  95 

F.  Hollwedel  Co.  v.  Auerbach  &  Co.,  S.  W.  1111,  1116,  16  Tex.  Ct.  Rep. 

67  N.  Y.  Misc.  148,  121  Supp.  597.  729,     writ    of    error    refused,     101 

36.  Santaquin   Min.   Co.    v.   High  Tex.  659.     See  also  Smith  v.  Texas 
Roller  Min.  Co.,  25  Utah  282,  289,  et  &  N.   O.  R.  Co.,  101  Tex.  405,   108 
seq.,    71    Pac.    77;    Spring    Garden  S.  W.  819.     And  William  Cameron 
Bank  v.  Hulings  Lumber  Co.,  32  W.  &   Co.    v.   Trueheart,   —  Tex.   Civ. 
Va.  357,  9  S.  E.  243,  3  L.  R.  A.  583.  App.  — ,  165  S.  W.  58. 

37.  Dyer  v.  Rich,  1  Mete.  (Mass.)  40.  112    Ga.    291,    37    S.    E.    419; 
180,   190;   White  Oak,  etc.,   Soc.   v.  see   also   Frank   v.    Drenkhahn,    76 
Murray,  145  Mo.  622,  47  S.  W.  501 ;  Mo.  508. 

Broadwell    v.    Merritt,    87    Mo.    95;  41.  Dyer  v.  Rich,  1  Mete.  (Mass.) 

Reinhard   v.   Virginia   Lead  Mining  180,  190,  and  see  Rotch's  Wharf  Co. 

Co.,  107  Mo.  616,  18  S.  W.  17.     Cf.  v.  Judd,  108  Mass.  224 ;  Rathbone  v. 

Jones   v.   Aspen   Hardware   Co.,   21  Tioga   Nav.   Co.,   2   Watts   &   Serg. 


PROMOTERS'  CONTRACTS.  139 

§  76.  Title  to  property  which  corporation  is  expressly  organ- 
ized to  acquire. 

It  has  been  held  that  the  organization  of  a  corporation,  pursu- 
ant to  a  special  act  describing  the  particular  real  estate  which  the 
corporation  is  to  take  over,  which  real  estate  is  owned  by  the 
incorporators  as  tenants  in  common,  vests  the  title  to  such  prop- 
erty in  the  corporation  without  further  action  on  the  part  of 
the  owners.42  Ordinarily,  however,  a  corporation  organized  to 
take  over  specific  real  property  does  not  obtain  title  except  by 
a  proper  deed  of  conveyance.43 

Title  to  personal  property  which  the  corporation  is  organized 
to  acquire  does  not  vest  in  the  corporation  without  some  act  of 
transfer,44  but  title  to  such  property  may  in  general  be  trans- 
ferred by  delivery.45 

§  77.  Liability  of  promoter  on  contract  made  for  the  corpora- 
tion. 

A  promoter  who  assumes  to  make  a  contract  for  a  projected 
corporation,  acts  as  agent  for  a  non-existing  principal,  and  is, 

(Pa.)    74;  Burhop  v.  City  of  Mil-  W.  417);   McLeary  v.   Dawson,  87 

waukee,    21    Wis.    257.    Cf.    Aspen  Tex.  524,  29  S.  W.  1044. 

Water  &  Light  Co.  v.  Aspen,  5  Colo.  Cf.  Cooke  v.  Watson,  30  N.  J.  Eq. 

App.  12,  37  Pac.  728.  345,  where  the  court,  under  the  spe- 

42.  Colquitt    v.    Howard,    11    Ga.  cial  facts,  held  the  equitable  title  to 
556;  Santa  Rosa  City  R.  Co.  v.  Cen-  have  passed  to  the  corporation, 
tral  St.  Ry.  Co.  (Cal.),  38  Pac.  986,  44.  Ruettell  v.  Greenwich  Ins.  Co., 
dealing  with  a  street  railroad  fran-  16  N.  D.  546,  113  N.  W.  1029 ;  Mana- 
chise;  and  see  Rau  v.  Union  Paper  ban   v.    Varnum,   11    Gray    (Mass.) 
Mill  Co.,  95  Ga.  208,  22  S.  E.  146.  405 ;  Florida  Coca  Cola  Bottling  Co. 
Cf.   Florida  Coca  Cola,  etc.,  Co.  v,  v.  Ricker,  136  Ga.  411,  71  S.  E.  734. 
Ricker,  136  Ga.  411,  71  S.  E.  734.  But   see   American    Silk    Works    v. 

43.  Leffingwell  v.  Elliott,  8  Pick.  Salomon,  4  Hun   (N.  Y.)   135,  6  T. 
(Mass.)  455,  19  Am.  Dec.  343;  Hoi-  &  C.  352;  Brooks  v.  Bonner,  —  Tex. 
land  v.  Cruft,  3  Gray   (Mass.)   162,  Civ.  App.  — ,  149  S.  W.  564. 

173;  Schneider  v.  Sellers,  81  S.  W.          45.  See  Grand  Rapids  Furniture 
126,    (modified,  98  Tex.   380,  84   S.      Co.  v.  Grand  Hotel,  etc.,  Co.,  11  Wyo. 

128,  70  Pac.  838,  72  Pac.  687. 


140 


THE  LAW  OF  PROMOTERS. 


according  to  the  weight  of  authority,  personally  liable  thereon,46 
unless  it  is  expressly  agreed  that  the  other  party  shall  look  for 


46.  Federal. — Marconi's  Telegraph 
Co.  v.  Cross,  16  Hawaii  390. 

Colorado. — C  o  1  o  r  a  d  o  Land  & 
Water  Co.  v.  Adams,  5  Colo.  App. 
190,  201,  37  Pac.  39;  Hersey  v. 
Tully,  8  Colo.  App.  110,  44  Pac.  854. 

Georgia. — Meinhard  Schaul  &  Co. 
v.  Bedingfield  Mercantile  Co.,  4  Ga. 
App.  176,  61  S.  E.  34,  36;  Pratt  v. 
Finkle,  99  Ga.  616,  25  S.  E.  941; 
Jos.  Rosenheim  Shoe  Co.  v.  Home, 
10  Ga.  App.  582,  73  S.  E.  953 ;  McRee 
v.  Quitman  Oil  Co.,  —  Ga.  App.  — , 
84  S.  E.  487;  Wells  v.  J.  A.  Fay  & 
Egan  Co.,  —  Ga.  — ,  85  S.  E.  873. 

Kansas. — Whetstone  v.  Crane 
Bros.  Manuf'g  Co.,  1  Kan.  App.  320, 
41  Pac.  211. 

Kentucky. — Kennedy  v.  Fulton 
Mercantile  Co.,  33  Ky.  L.  R.  60,  108 
S.  W.  948. 

Michigan. — Belding  Land  &  Imp. 
Co.  v.  City  of  Belding,  128  Mich.  79, 
87  N.  W.  113;  Carmody  v.  Powers, 
60  Mich.  26,  26  N.  W.  801,  13  Am.  & 
Eng.  Corp.  Cas.  4.  Cf.  Durgin  v. 
Smith,  133  Mich.  331,  94  N.  W. 
1044;  Lockwood  v.  Wynkoop,  178 
Mich.  388,  144  N.  W.  846. 

Missouri. — Queen  City  Furniture 
Co.  v.  Crawford,  127  Mo.  356,  364,  30 
S.  W.  163,  165;  Hurt  v.  Salisbury, 
55  Mo.  310;  Lewis  v.  Fisher,  167 
Mo.  App.  674,  151  S.  W.  172. 

New  York. — Oakes  v.  Cattaraugus 
Water  Co.,  143  N.  Y.  430,  439-440, 
38  N.  E.  461,  62  St.  Rep.  445,  26  L. 
R.  A.  544;  Hub  Publishing  Co.  v. 
Richardson,  13  Supp.  665;  37  St  R. 
541,  59  Hun  626;  Munson  v.  Syra- 


cuse G.  &  C.  R.  R.  Co.,  103  N.  Y. 
58,  76,  8  N.  E.  355,  29  Am.  &  Eng. 
R.  R.  Cas.  377. 

Ohio. — Mosier  v.  Parry,  60  Ohio 
St.  388,  54  N.  E.  364;  Farmer's 
Co.-op.  Trust  Co.  v.  Floyd,  47  Ohio 
St.  525,  26  N.  E.  110,  12  L.  R.  A. 
346,  21  Am.  St.  Rep.  846. 

Pennsylvania. — Bell's  Gap  R.  R. 
Co.  v.  Christy,  79  Pa.  54,  59,  21  Am. 
Rep.  39;  O'Rorke  v.  Geary,  207  Pa. 
240,  56  Atl.  541. 

Texas. — Weatherford  M.  W.  &  N. 
W.  Ry.  Co.  v.  Granger,  86  Tex.  350, 
354,  24  S.  W.  795,  40  Am.  St.  Rep. 
837;  Ennis  Cotton  Oil  Co.  v.  Burks, 
39  S.  W.  966;  Bradshaw  v.  Jones, 
—  Tex.  Civ.  App.  — ,  152  S.  W.  695. 

United  Kingdom  and  Colonies. — 
Caledonian  &  Dumbartonshire  Ry. 
Co.  v.  Magistrates  of  Helensburgh, 
2  Macq.  391,  407^08,  2  Jur.  N.  S. 
695 ;  In  re  Hereford  &  South  Wales 
Waggon  &  Engineering  Co.,  L.  R. 
2  Ch.  Div.  621,  627,  35  L.  T.  N.  S. 
40;  Hopcroft  v.  Parker,  16  L.  T.  N. 
S.  561 ;  Bell  v.  Francis,  9  C.  &  P.  66; 
Barton  v.  Hutchinson,  2  Car.  &  K. 
712;  Job  v.  Lamb,  25  L.  J.  Exch. 
87;  Cullen  v.  O'Meara,  Ir.  R.  1 
Com.  Law  640,  reversed  on  other 
grounds,  Ir.  R.  4  Com,  Law  537; 
Clergue  v.  Humphrey,  31  Can.  S. 
C.  66;  Coit  v.  Dowling,  4  N.  W. 
Terr.  464;  Thomson  v.  Feeley,  41 
U.  C.  Q.  B.  229 ;  Thames  Nav.  Co.  v. 
Reid,  9  Ont.  754,  rev'd,  13  Ont  App. 
303. 

See  note  to  Greenberg  v.  Whit- 
comb  Lumber  Co.,  48  Am.  St.  Rep. 


PROMOTERS'  CONTRACTS. 


141 


performance  only  to  the  corporation  to  be  formed  and  in  no  event 
to  the  promoter.47     If  the  promoter  is,  under  the  terms  of  the 


911,  914.  See  also  cases  cited  in 
succeeding  notes. 

This  may  not  be  the  rule  in  all 
jurisdictions. 

Alabama. — McQuiddy  Printing  Co. 
v.  Head,  7  Ala.  App.  384,  62  So.  287. 

Illinois. — Seeberger  v.  McCor- 
mick,  178  111.  404,  416,  53  N.  E.  340, 
affirming,  73  111.  App.  87,  writ  of 
error  dismissed,  175  U.  S.  274,  44  L. 
Ed.  161,  20  Sup.  Ct.  128. 

Massachusetts. — Jefts  v.  York,  4 
Gush.  371,  50  Am.  Dec.  791;  same 
v.  same,  10  Cush.  392. 

Michigan. — See  supra. 

And  see  16  Am.  Law.  Rev.  281, 
282. 

A  somewhat  different  situation 
arises  if  the  other  party  to  the  con- 
tract is  also  one  of  the  promoters 
of  the  corporation.  Belding  v. 
Vaughan,  108  Ark.  69,  157  S.  W. 
400. 

It  is  held  in  Bradshaw  v.  Jones, 
—  Tex.  Civ.  App.  — ,  152  S.  W.  695, 
that  the  promoters  are  not  liable 
for  services  rendered  directly  to  the 
corporation  after  its  organization, 
though  pursuant  to  a  contract  made 
with  the  promoters  before  its  or- 
ganization. 

To  hold  the  promoters  liable  it 
must  be  shown  that  they  actually 
made  a  contract.  Mere  negotia- 
tions for  a  contract  to  be  made 
with  the  corporation  when  organ- 
ized, do  not  fasten  any  liability 
upon  them.  Donaldson  Bond  & 
Stock  Co.  v.  Houck,  213  Mo.  416, 
112  S.  W.  242. 


As  to  whether  the  promoters  can 
be  held  personally  liable  where  the 
corporation  is  organized  on  the 
same  day  that  the  contract  is  made, 
see  Ryland  v.  Hollinger,  117  Fed. 
Rep.  216,  54  C.  C.  A.  248;  see  also 
Lockwood  v.  Wynkoop,  178  Mich. 
388,  144  N.  W.  846. 

As  to  the  liability  of  the  pro- 
moters for  damages  for  personal  in- 
juries suffered  pending  the  com- 
plete organization  of  the  corpora- 
tion, see  Farmers'  Gin  &  Milling  Co. 
v.  Jones,  —  Tex.  Civ.  App.  — ,  147 
S.  W.  668. 

In  Selkirk  v.  Windsor,  etc.,  Rail- 
way Co.,  20  Ont.  L.  R.  290,  15  Ont. 
W.  R.  87,  the  promoters'  liability 
was  based  upon  their  misrepresenta- 
tion as  to  their  authority  to  bind 
the  company.  See  also  Seeberger  v. 
McCormick,  178  111.  404,  53  N.  E. 
340,  affirming,  73  111.  App.  87,  writ 
of  error  dismissed,  175  U.  S.  274,  44 
L.  Ed.  161,  20  Sup.  Ct.  128. 

47.  Federal. — Wiley  v.  Borough 
of  Towanda,  26  Fed.  Rep.  594; 
Marconi's  Telegraph  Co.  v.  Cross, 
16  Hawaii  390. 

Georgia. — Wells  v.  J.  A.  Fay  & 
Egan  Co.,  —  Ga.  — ,  85  S.  E.  873. 

Missouri. — Queen  City  Furniture 
Co.  v.  Crawford,  127  Mo.  356,  30  S. 
W.  163. 

Pennsylvania. — O'Rorke  v.  Geary, 
207  Pa.  240,  56  Atl.  541 ;  Dengler  v. 
Helms,  4  Walker  476,  481. 

Texas. — Weatherford  M.  W.  & 
N.  W.  Ry.  v.  Granger,  86  Tex.  350, 
352,  24  S.  W.  795,  796,  40  Am.  St. 


142 


THE  LAW  OF  PROMOTERS. 


contract,  not  to  be  held  individually  responsible  for  the  perform- 
ance thereof,  there  is,  until  the  corporation  after  its  organization 
assumes  responsibility,  no  mutuality  of  contract,  and  the  pro- 
moter's agreement  constitutes,  in  the  absence  of  an  independent 
consideration,  a  mere  offer  not  binding  upon  any  one. 

An  agreement  will  not  be  construed  as  intending  that  the  pro- 
moter is  to  be  free  from  personal  responsibility,  unless  that  in- 
tention is  clearly  stated.48 

If  the  written  contract  contains  no  provision  to  that  effect, 
evidence  of  a  parol  understanding  that  the  promoters  should  be 
free  from  personal  liability,  is  inadmissible.49 

The  promoters  of  a  corporation  are  not  partners  50  and  have, 


Rep.  837;  Ennis  Cotton  Oil  Co.  v. 
Burks,  39  S.  W.  966;  Bradshaw  v. 
Jones,  —  Tex.  Civ.  App.  — ,  152  S. 
W.  695. 

Virginia. — Strause  v.  Richmond 
Woodworking  Co.,  109  Va.  724,  65 
S.  E.  659,  132  Am.  St.  R.  937. 

United  Kingdom  and  Colonies. — 
Touche  v.  Metropolitan  Ry.  Ware- 
housing Co.,  L.  R.  6.  Ch.  App.  671, 
676;  Parsons  v.  Spooner,  5  Hare, 
102;  Higgins  v.  Hopkins,  3  Exch. 
163;  Giles  v.  Smith,  11  Jur.  334; 
Landman  v.  Entwistle,  7  Exch.  632 ; 
Kerridge  v.  Hesse,  9  Car.  &  Payne 
200;  Thomson  v.  Feeley,  41  U.  C. 
Q.  B.  229 ;  Thames  Nav.  Co.  v.  Reid, 
13  Ont.  App.  303,  307. 

And  see  post,  §§  88,  316. 

It  has  been  held  that  one  who 
loans  money  to  the  promoter  under 
an  agreement  that  he  shall  be  re- 
paid when  the  promoter  receives  the 
money  from  the  corporation,  cannot 
recover  from  the  promoter  if  the 
corporation  is  not  formed,  Wheeler 
v.  Fradd,  14  Times  Law  Rep.  302. 


A  promoter  who  as  "  agent  and 
trustee "  for  the  proposed  corpora- 
tion agrees  to  make  a  certain  pay- 
ment upon  the  organization  of  the 
corporation,  is  not  liable  if  the  cor- 
poration is  not  organized.  Belding 
v.  Vaughan,  108  Ark.  69,  157  S.  W. 
400. 

48.  See  Scott  v.  Lord  Ebury,  L. 
R.  2  C.  P.  255,  36  L.  J.  C.  P.  161. 

See  post,  §  88. 

It  was  held  in  Lewis  v.  Smith, 
19  L.  J.  C.  P.  278,  that  an  agree- 
ment to  indemnify  a  provisional 
committeeman  against  personal  re- 
sponsibility and  to  hold  him  harm- 
less against  any  costs,  charges  and 
expenses  incurred  in  the  formation 
of  the  company  does  not  extend  to 
costs  incurred  in  the  defense  of 
an  action  unsuccessfully  brought 
against  such  provisional  committee- 
man. 

49.  See  Bonn   Mfg.   Co.   v.   Reif, 
116  Wis.  471,  93  N.  W.  466. 

50.  See  post,  §§  302,  316. 


PROMOTERS'  CONTRACTS. 


143 


in  the  absence  of  an  express  or  implied  authorization,  no  power 
to  act  for  nor  bind  each  other.  It  follows  that  only  those  pro- 
moters can  be  held  liable  on  a  contract  made  for  the  corporation, 
who  either  themselves  made  the  contract,  or  in  some  way  au- 
thorized or  sanctioned  it.51  The  question  whether  a  contract  is 
authorized  or  sanctioned  by  a  particular  promoter  is  one  of  fact,52 
and  while  the  burden  of  proof  rests  upon  the  party  asserting  the 
promoter's  liability  53  an  authorization,  or  sanction,  will  readily 
be  inferred.54  The  courts  look  through  the  form  of  the  transac- 
tion to  the  substance,  and  seek  to  hold  the  actual  principals.55 


51.  Kennedy  v.  Pulton  Mercantile 
Co.,  33  Ky.  Law  Rep.  60,  108  S.  W. 
D4S ;  Railroad  Gazette  v.  Wherry,  58 
Mo.  App.  423;  Hepner  v.  Maybury, 
23   N.   Y.    Misc.   262,   51    Supp.   170, 
(citing  Taylor  on  Private  Corpora- 
tions, §  77) ;  Beale  v.  Mouls,  10  Ad. 
&  El.  N.  S.  976;  Hung  Man  v.  Ellis, 
3   Brit.   Col.   486;   Thames  Naviga- 
tion Co.  v.  Reid,  13  Ont.  App.  303, 
311. 

And  see  post,  §  316. 

Presumably,  nothing  to  the  con- 
trary is  intended  by  the  somewhat 
loosely  worded  dictum  in  Lewis  v. 
Fisher,  167  Mo.  App.  674,  676-677, 
151  S.  W.  172. 

As  to  the  liability  of  those  who 
allow  their  names  to  be  published 
as  directors  of  the  proposed  com- 
pany, see  Collingwood  v.  Berkeley, 
15  C.  B.  N.  S.  145,  evidently  de- 
cided upon  the  particular  facts. 

As  to  the  liability  of  promoters 
who  with  the  knowledge  and  con- 
sent of  the  opposite  party  drop  out 
before  the  organization  of  the  cor- 
poration, see  Burgess  v.  Sherman, 
147  Pa.  254,  23  Atl.  554. 

52.  Reynell  v.  Lewis,  15  M.  &  W. 


517,  and  see  post,  §  88  and  §  316n. 

53.  Wood   v.   Argyll,   6  M.   &   G. 
928,  and  see  post,  §  316n. 

54.  Roberts  Mfg.   Co.   v.   Schlick, 
62  Minn.  332,  64  N.  W.  826;  same  v. 
Wright,    62    Minn.    337,    64    N.    W. 
827,  and  see  post,  §  88  and  §  316n. 

55.  McFall  v.  McK.  &  Y.  Ice  Co., 
123  Pa.  253,  16  Atl.  478. 

Subscribers  for  the  shares  of  the 
corporation  are  not  liable  upon  the 
promoter's  contracts,  (Esper  v.  Mil- 
ler, 131  Mich.  334,  91  N.  W.  613; 
Shibley  v.  Angle,  37  N.  Y.  626; 
Rambaut  v.  Tevis,  164  N.  Y.  App. 
Div.  324,  149  Supp.  993;  Dengler  v. 
Helms,  4  Walker  (Pa.)  476,  484), 
unless  the  promoter  was  expressly 
authorized  to  act  for  them.  Buf- 
flngton  v.  Bardon,  80  Wis.  635,  50 
N.  W.  776. 

An  agreement  to  advance  the 
money  necessary  for  the  purchase  of 
a  mine,  made  in  consideration  of  a 
promise  of  a  certain  portion  of  the 
capital  stock  of  the  projected  cor- 
poration which  is  to  take  over  the 
mine,  does  not  make  the  lender 
liable  as  an  undisclosed  principal 
upon  a  note  of  the  promoter,  given 


144  THE  LAW  OF  PROMOTERS. 

The  liability  of  those  promoters  who  can  be  connected  with  the 
contract  has  been  said  to  be  joint,56  and  a  promoter  who  has  been 
made  to  bear  the  entire  obligation  of  a  contract  is  entitled  to 
contribution  from  such  of  his  fellow  promoters  as  were  likewise 
responsible  therefor.57  Where,  however,  expenses  have  been  in- 
curred by  other  promoters,  the  promoter  seeking  contribution 
must  consent  to  the  taking  of  an  account  of  all  the  expenses  so 
that  the  mutual  liabilities  of  all  the  promoters  may  be  determined 

in  one  action.58 

• 
§  78.  Liability  of  promoter  after  obligations  are  assumed  by 

corporation. 

That  the  promoters  are  personally  liable  on  the  contracts  made 
by  them  for  the  proposed  corporation  is  established  by  the  great 
weight  of  authority.  The  question  of  the  liability  of  the  pro- 
moters after  the  corporation  has  been  organized  and  has  assumed 
the  performance  of  the  contract  made  for  it  by  them,  is  one  on 
which  the  cases  are,  however,  not  in  accord. 

Some  cases  hold  that  when  a  corporation  has  treated  as  binding 

in    part    payment    for    the    mine,  protection  of  the  plaintiff,  and  not 

Krohn  v.  Lambeth,  114  Cal.  302,  46  an    agreement    to    indemnify    him 

Pac.  164.  against   liability   on   the   note,   and 

In    Maxey   v.    Hideout,    173   Fed.  that  the  plaintiff  had,  before  satis- 

Rep.  172,  the  defendant  had  agreed  fying      the      judgment      recovered 

with  the  plaintiff  to  advance  to  the  against    him,    no    right    of    action 

corporation  sufficient  money  to  en-  against  the  defendant, 

able   it   to   pay   for   lands    sold   to  56.  Bailey   v.   Haines,   15   Ad.   & 

it   by   the   plaintiff.     The   plaintiff  El.  N.   S.   533.     And  see  McRee  v. 

accepted  the  corporation's  notes  in  Quitman   Oil  Co.,  —   Ga.   App.  — , 

payment    and    discounted     one    of  84  S.  E.  487. 

them.      The    corporation    failed    to  57.  Boulter    v.    Peplow,    9   C.    B. 

pay  this  note  at  maturity.    The  de-  493 ;  Batard  v.  Douglas,  2  El.  &  Bl. 

fendant  refused  to  protect  the  note  287;  Batard  v.  Hawes,  2  El.  &  Bl. 

and  judgment  was  taken  against  the  287 ;   Edger  v.   Knapp,  7  Jur.  583 ; 

plaintiff  as  indorser.     It  was  held  and  see  Norbury's  Case,  5  DeG.  & 

that  the  defendant's  contract  to  ad-  Sm.  423,  and  Sandusky  Coal  Co.  v. 

vance  money  for  the  promotion  of  Walker,  27  Ont.  677. 

the  corporation   was  an  agreement  58.  Denton   v.   Macneil,   L.   R.   2 

to  create  an  indemnity  fund  for  the  Eq.  352. 


PROMOTERS'  CONTRACTS.  145 

upon  it,  a  contract  made  on  its  behalf  before  its  organization  upon 
the  understanding  by  all  the  parties  that  such  contract  was  made 
on  behalf  of  the  proposed  corporation,  the  adoption  of  the  con- 
tract by  the  corporation  makes  it  in  all  respects  what  it  would 
have  been  had  the  corporate  power  existed  when  the  contract  was 
entered  into  by  the  promoters,  and  that  the  promoters  are  thereby 
released  from  further  liability.59  This  rule  would  in  most  cases 
undoubtedly  effect  justice  between  the  parties.  When  the  pro- 
moters agree  that  the  corporation  to  be  organized  by  them  shall 
enter  into  a  particular  contract,  and  the  corporation  is  organized 
in  accordance  with  the  terms  of  the  agreement,  the  assumption  by 
the  corporation  of  the  obligations  of  the  contract  constitutes  a 
complete  and  exact  performance  of  the  promoters'  engagements 
and  should  relieve  them  from  further  responsibility.  Some  cases, 
however,  hold  that  the  agreement  entered  into  by  the  promoters 
contsitutes  a  valid  contract  with  the  opposite  party,  and  that 
the  assumption  of  its  obligations  by  the  corporation  cannot,  with- 
out the  consent  of  such  opposite  party,  release  the  promoters 
from  liability  thereon.60  The  promoters  may,  of  course,  protect 

59.  Federal.— Whitney  v.  Wyman,  W.  668,  26  L.  R.  A.  509,  45  Am.  St. 

101  U.  S.  392,  25  L.  Ed.  1050;  Har-  R.  700,  is  not  really  in  point, 

rill  v.  Davis,  168  Fed.  Rep.  187,  94  Washington.— Chilcott    v.    Wash- 

C.  C.  A.  47,  22  L.  R.  A.  N.  S.  1153.  ington    State    Colonization    Co.,    45 

Georgia.— Chic.  Bldg.  &  Mfg.  Co.  Wash.  148,  88  Pac.  113. 

v.  Talbotton,  etc.,  Co.,  106  Ga.  84,  60.  Federal.— Bonsall     v.     Platt, 

31  S.  E.  809.  153  Fed.  Rep.  126,  82  C.  C.  A.  260. 

Indian  Territory. — Western  In-  Petition  for  writ  of  certiorari  de- 
vestment  Co.  v.  Davis,  7  Ind.  Terr,  nied,  206  U.  S.  564,  27  Sup. 
152,  104  S.  W.  573,  15  Am.  &  Eng.  Ct.  796,  51  L.  Ed.  1190;  Am- 
Ann.  Cas.  1134,  reversed,  sub  nom.;  erican  Paper  Bag  Co.  v.  Van 
Harrill  v.  Davis,  168  Fed.  Rep.  187,  Nortwick,  52  Fed.  Rep.  752,  3  C.  C. 
94  C.  C.  A.  47,  22  L.  R.  A.  N.  S.  A.  274,  9  U.  S.  App.  25;  Marconi's 
1153.  Telegraph  Co.  v.  Cross,  16  Hawaii, 

Pennsylvania. — Heckman's  Estate,  390,    citing    Clark    &    Marshall    on 

172  Pa.  185,  33  Atl.  552.  Priv.  Corp.  107. 

Tennessee. — Shields      v.      Clifton  Maryland. — Holland    v.    Lee,    71 

Hill  Land  Co.,  94  Tenn.  123,  28  S.  Md.  338,  18  Atl.  661. 


146 


THE  LAW  OF  PROMOTERS. 


themselves  by  stipulating  in  their  contract  that  they  shall,  upon 
the  assumption  of  their  contract  by  the  projected  corporation,  be 
released  from  further  personal  liability  thereunder.61 

It  is  generally  held  that  the  promoters  are  released  from  further 
responsibility  if  the  other  party  accepts  the  corporate  responsi- 
bility.62 The  mere  presentation  by  the  opposite  party  of  a  claim 
against  the  corporation  does  not  release  the  promoters  from  lia- 
bility. That  result  is  only  affected  when  it  is  made  to  appear,  not 
only  that  the  opposite  party  expressed  his  willingness  to  accept 
the  corporate  liability,  but  also  that  the  corporation*  accepted 
responsibility.63  It  has  been  held  that  the  promoters  are  not  re- 
leased by  the  opposite  party's  acceptance  of  partial  payments 


Missouri. — Queen  City  Furniture 
€o.  v.  Crawford,  127  Mo.  356,  365, 
30  S.  W.  163,  166. 

Pennsylvania. — Witmer  v.  Schlat- 
ter,  2  Rawle,  359. 

Texas. — Bradshaw  v.  Jones,  — 
Tex.  Civ.  App.  — ,  152  S.  W.  695. 

Virginia. — Fentress  v.  Steele  & 
Sons,  110  Va.  578,  66  S.  E.  870; 
Strause  v.  Richmond  Woodworking 
Co.,  109  Va.  724,  65  S.  E.  659,  132 
Am.  St.  R.  937,  citing  Taylor  on 
Priv.  Corp.,  §  76. 

Wisconsin. — Bohn  Mfg.  Co.  v. 
Kief,  116  Wis.  471,  93  N.  W.  466. 

United  Kingdom  and  Colonies. — 
Kelner  v.  Baxter,  L.  R.  2  Com.  PL 
Cas.  174 ;  Sugg  &  Co.,  Ltd.,  v.  Hill, 
10-  Times  Law  Rep.  288;  Scott  v. 
Lord  Ebury,  L.  R.  2  C.  P.  255,  267, 
270,  36  L.  J.  C.  P.  161. 

61.  O'Rorke  v.  Geary,  207  Pa.  240, 
56  Atl.  541. 

62.  Case  Mfg.  Co.  v.  Soxman,  138 
U.  S.  431,  11  Sup.  Ct  360,  34  L.  Ed. 
1019;    Van    Vlieden    v.    Welles,    6 
Johns    (N.    Y.)    84;    Mildenberg   v. 


James,  31  N.  Y.  Misc.  607,  66  Supp. 
77,  aff'd,  62  App.  Div.  617,  71  Supp. 
1142,  aff'd,  175  N.  Y.  494,  67  N.  E. 
1085;  J.  H.  Lane  &  Co.  v.  United 
Oil  Cloth  Co.,  103  N.  Y.  App.  Div. 
378,  92  Supp.  1061;  Munson  v. 
Magee,  161  N.  Y.  182,  55  N.  E.  916, 
reargument  denied,  161  N.  Y.  638,  57 
N.  E.  1118;  Rudd  v.  Magee,  51  N. 
Y.  App.  Div.  624,  65  Supp.  65 ;  Ennis 
Cotton  Oil  Co.  v.  Burks,  (Tex.), 
39  S.  W.  966.  And  see  Bradshaw  v. 
Jones,  —  Tex.  Civ.  App.  — ,  152  S. 
W.  695. 

Cf.  Bohn  Mfg.  Co.  v.  Reif,  116 
Wis.  471,  93  N.  W.  466;  Dengler  v. 
Helms,  4  Walker  (Pa.)  476,  483. 

It  was  held  in  Scott  v.  Lord 
Ebury,  L.  R.  2  C.  P.  255,  36  L.  J.  C. 
P.  161  that  under  the  circumstances 
of  that  case  the  creditor  by  bringing 
suit  against  the  corporation  did  not 
release  the  promoters  from  liability 
upon  a  loan  made  to  them. 

63.  Sugg  &  Co.,  Ltd.,  v.  Hill,  10 
T.  L.  R.  288;  Longman  v.  Hill,  7  T. 
L.  R.  639. 


PROMOTERS'  CONTRACTS.  147 

made  by  the  corporation,  and  not  necessarily  by  his  bringing  suit 
against  it.64 

It  has  been  said  that  after  the  corporation  has  assumed  re~ 
sponsibility  for  the  performance  of  the  promoters'  contract,  the 
promoters,  if  not  completely  released,  become,  as  between  them- 
selves and  the  corporation,  sureties  for  the  latter,  and  are  re- 
leased from  liability  if  the  opposite  party  with  knowledge  of  the 
facts  deals  with  the  corporation  in  such  a  way  as  to  prejudice  the 
promoters'  rights.65  If  the  promoters  are  made  to  satisfy  the 
obligations  which  have  been  assumed  by  the  corporation,  they  are 
as  such  sureties  entitled  to  be  subrogated  to  the  claim  of  the  other 
party  against  the  corporation.66 

It  has,  in  one  case,  been  said  that  if  the  corporation  has  as- 
sumed responsibility  for  the  performance  of  the  promoters'  con- 
tract, both  it  and  the  promoters  may  be  joined  as  parties  defend- 
ant in  an  action  thereon.67 

The  fact  that  the  act  of  the  corporation  in  assuming  responsi- 
bility for  the  performance  of  the  promoter's  contract,  is  voidable 
because  the  promoter  himself  voted  as  a  director  upon  the  reso- 
lution pursuant  to  which  such  responsibility  was  assumed,  does 
not  affect  the  question  of  the  promoter's  discharge,  as  the  action 
of  the  directors  is  voidable  only  upon  the  complaint  of  the  corpo- 
ration.68 

§  79.  Enforcement  of  contract  by  promoter. 

After  a  contract  made  by  the  promoter  has  been  assumed  by 
the  corporation,  or,  strictly  speaking,  after  the  corporation  has 
entered  upon  a  new  contract  upon  the  terms  of  the  agreement 

64.  Wells  v.   J.   A.   Fay  &  Egan  An   action   for  compensation   for 
Co.,  —  Ga.  — ,  85  S.  E.  873.  services  rendered  for  the  benefit  of 

65.  Bonn   Mfg.    Co.    v.    Rief,   116  the  promoter  individually  cannot  be 
Wis.  471,  93  N.  W.  466.  joined     with     a     cause     of     action 

66.  Bank    of    South    Carolina    v.  against   the   corporation.     Jones   v. 
Campbell,  2  Rich.  Eq.  179.  Smith,  (Tex.),  87  S.  W.  210. 

67.  Jones  v.  Smith,  (Tex.),  87  S.  68.  Munson  v.  Magee,  161  N.  Y. 
W.  210.  182,  55  N.  E.  916,  reargument  denied, 


148  THE  LAW  OF  PROMOTERS. 

which  the  promoter  attempted  to  make  for  it  before  its  organiz- 
ation, the  corporation  is,  in  case  of  breach,  the  only  proper  party 
to  bring  suit.69 

If,  however,  the  other  party  breaches  the  contract,  or  with- 
draws therefrom,  before  any  binding  agreement  with  the  corpo- 
ration has  been  made,  no  cause  of  action  accrues  to  the  latter.70 
The  only  binding  agreement  that  in  such  case  exists  is  the  con- 
tract between  the  promoter  and  the  opposite  party.  An  action 
for  the  breach  of  this  contract  may  be  maintained  by  the  pro- 
moter and  such  damages  recovered  as  were  fairly  in  contempla- 
tion at  the  time  of  making  the  agreement.71 

A  question  arises  as  to  whether  a  suit  may  be  maintained  by 
the  promoter  for  the  specific  performance  of  the  agreement  of 
the  opposite  party  to  convey  lands  to  the  corporation.  There 
should  be  no  difficulty  in  sustaining  such  suit  in  a  proper  case. 
The  promoter  is  a  party  to  a  valid  agreement  in  the  enforcement 
of  which  he  has  in  almost  every  case  a  personal  interest. 

In  Rogers  v.  Penobscot  Mining  Co.,72  an  agreement  with  the 
promoter  to  convey  mining  claims  to  a  proposed  corporation  was 
specifically  enforced  at  the  suit  of  the  promoter's  assignees.  Op- 
tions upon  these  mining  claims  had,  however,  in  that  case  been 
procured  by  the  promoter  in  the  name  of  the  individual  defendant, 
under  an  agreement  that  the  latter  should  convey  the  options  to 
the  corporation  to  be  formed,  and  the  suit  might  well  have  been 
sustained  as  an  action  to  enforce  a  trust. 


161  N.  Y.  638,  57  N.  E.  1118 ;  Rudd  and  see  DeLery  v.  Rogers,  71  N.  Y. 

v.  Magee,  51  N.  Y.   App.  Div.  624,  App.  Div.  99,  75  Supp.  513. 

65  Supp.  65.  72.  154  Fed.  Rep.  606,  83  C.  C.  A. 

69.  See  ante,  §  73.  380. 

70.  See  ante,  §  73.  See  Burke  v.  Mead,  159  Ind.  252, 

71.  Abbott  v.  Hapgood,  150  Mass.  64  N.  E.  880,  where  a  suit  by  a  pro- 
248,  22  N.  E.  907,  5  L.  R.  A.  586,  15  moter  for  specific  performance  of  an 
Am.    St.    Rep.    193 ;    Drummond    v.  agreement  to  convey  to  the  corpora- 
Crane,  159  Mass.  577,  35  N.  E.  90,  23  tion  was  dismissed  on  other  grounds. 
L.  R.  A.  707,  38  Am.   St.  Rep.  460, 


PROMOTERS'  CONTRACTS.  149 

If  the  promoters  fail  to  organize  the  corporation  which  was 
under  the  agreement  to  assume  the  performance  of  their  contract, 
or  if  the  corporation  after  its  organization  refuses  to  be  bound 
by  its  terms,  the  other  party  cannot  be  compelled  to  carry  out  the 
agreement  with  the  promoters  as  individuals.  His  contract  con- 
templates performance  by  the  corporation,  and  he  may  properly 
refuse  to  accept  performance  by  the  promoters.73 

In  Niles  v.  Graham,74  the  defendant  delivered  to  the  plaintiff  an 
assignment  of  a  certain  patent,  under  an  agreement  that,  after 
certain  clouds  thereon  had  been  removed,  the  patent  should  be  as- 
signed to  a  corporation  to  be  formed,  the  working  capital  of  which 
was  to  be  furnished  by  the  plaintiff  and  the  shares  divided  equally 
between  the  parties.  While  the  plaintiff  was  proceeding  to  have 
the  clouds  on  the  patent  removed  the  defendant  wrongfully  re- 
possessed himself  of  the  written  assignment,  mutilated  it,  and 
thereafter  refused  to  recognize  it  as  binding.  The  court  directed 
the  plaintiff  to  re-execute  the  assignment,  saying  that  if  the  plain- 
tiff did  not  within  a  reasonable  time  assign  the  patent  to  a  corpo- 
ration formed  as  provided  in  the  agreement  and  furnish  the  capital 
reasonably  necessary  therefor  the  defendant  might  have  an  action 

for  damages. 

I 

§  80.  Pleading  the  promoter's  contract. 

After  the  obligations  of  a  contract  made  by  the  promoter  have 
been  assumed  by  the  corporation,  a  pleading  based  thereon  must 
set  forth  the  making  of  the  contract  by  the  promoter  and  the 
subsequent  acts  of  the  fully  organized  corporation  by  which  the 
obligations  of  the  contract  became  binding  upon  it,75  or  else, 
without  referring  to  the  contract  of  the  promoter,  set  forth  the 

73.  See  O'Neill   v.   Patterson,   27  see  Schmidt  v.  Nelke  Art  Lithograph 
Pitts.  Leg.  Journal  O.  S.  189.  Co.,  16  N.  Y.  Misc.  300,  74  St.  Rep. 

74.  181  Mass.  41,  62  N.  E.  986.  308,  37  Supp.  1138,  reversed,  17  N. 

75.  Penn    Match  Co.  v.  Hapgood,  Y.  Misc.  124,  39  Supp.  353. 
141  Mass.  145,  149,  7  N.  E.  22,  and 


150  THE  LAW  OP  PROMOTERS. 

making  of  an  agreement  by  the  corporation  at  the  date  when  it 
accepted  responsibility  for  the  performance  of  the  obligations  of 
the  promoter's  contract.76 

76.  McArthur   v.   Times   Printing      Fire  Ins.  Assn.  v.  Burch,  46  S.  C. 
Co.,  48  Minn.  319,  51  N.  W.  216,  31      550,  24  S.  E.  503. 
Am.    St.   Rep.   653;    Farmers'   Mut. 


CHAPTER  V. 

OF  PROMOTION  EXPENSES. 

/ 
Section   81.  Introductory. 

82.  Promoter's  right  to  reimbursement  for  expenses.. 

83.  What  expenses  allowed. 

84.  Compensation  for   services. 

85.  Compensation  of  fraudulent  promoters. 

86.  Compensation   for   serivces   in   obtaining  subscriptions-. 

87.  Amount  of  compensation  by  whom  fixed. 

88.  Compensation  of  persons  employed  by  promoters. 

§  81.  Introductory. 

Questions  relating  to  the  payment  of  the  expenses  of  an  abortive 
attempt  to  organize  a  corporation  will  be  considered  in  a  subse- 
quent chapter.1  This  chapter  is  devoted  to  a  consideration  of  the. 
expenses  of  a  successful  promotion. 

§  82.  The  promoter's  right  to  reimbursement  for  expenses; 

Ordinary  fairness  seems  to  require  that  the  promoter  should  be* 
reimbursed,  out  of  the  funds  of  the  corporation,  for  the  proper 
and  legitimate  expenses  of  the  promotion.  While  the  promoter's 
right  to  reimbursement  for  expenses  seems  to  be  recognized  by  the 
great  weight  of  authority  in  this  country,2  the  matter  is  in  Eng- 
land not  free  from  doubt.3 

1.  See  post,  Chapter  XIX.  Massachusetts. — Hayward  v.  Lee- 

2.  Federal. — Dickerman  v.  North-  son,  176  Mass.  310,  322,  57  N.  E.  656, 
era  Trust  Co.,  176  U.  S    181,  205-  49  L.  R.  A.  725;  and  see  Salem  Mill 
206,  20  Sup.  Ct.  311,  44  L.  Ed.  423.  Dam  Corporation  v.  Ropes,  6  Pick. 

Iowa. — Caffee     v.     Berkley,     141      23,  42. 
Iowa  344,  347,  118  N.  W.  267,  268.  Michigan.— Cuba    Colony    Co.    v. 

Maine.— Mason  v.  Carrothers,  105      Kirby,  149  Mich.  453,  458,  112  N.  W. 
Me.  392,  410,  74  Atl.  1030,  1037-1038.      1133,  1135. 

(151) 


152 


THE  LAW  OF  PROMOTERS. 


The  promoter  is  not,  in  any  jurisdiction,  entitled  to  reimburse- 
ment for  moneys  advanced,  or  expenses  incurred,  by  him  if  he 
either  represented  to  his  associates,  or  allowed  them  to  believe, 
that  no  allowance  for  promotion  expenses  would  be  asked,4  or  if 
the  expenses  were  incurred  without  expectation  of  reimbursement.5 

§  83.  What  expenses  allowed. 

The  promoters  are  entitled  to  reimbursement  only  for  legiti- 
mate expenses.  They  are  not  entitled  to  reimbursement  for 
moneys  expended  by  them  in  bribing  public  officials,6  or  in  "  rig- 
ging the  market,"  7  or  in  any  other  improper  manner. 


New  Jersey. — Bigelow  v.  Old  Do- 
minion Copper,  etc.,  Co.,  74  N.  J.  Eq. 
457,  501,  71  Atl.  153. 

Contra  Rockford  R.  I.  &  St.  L.  R. 
R.  Co.  v.  Sage,  65  111.  328,  332,  16 
Am.  Rep.  587;  Gulliver  v.  Roelle, 
100  111.  141,  148;  Weatherford,  etc., 
R.  R.  Co.  v.  Granger,  86  Tex.  350, 
357,  24  S.  W.  795,  40  Am.  St.  Rep. 
837,  overruling  McDonough  v.  Bank 
of  Houston,  34  Tex.  309 ;  Jones  v. 
Smith,  (Tex.),  87  S.  W.  210;  Secur- 
ity Co.  v.  Bennington  Monument 
Ass'n,  70  Vt.  201,  206,  40  Atl.  43. 

As  to  making  allowance  for  pro- 
motion expenses,  as  an  item  of  value 
of  plant,  in  proceedings  to  fix 
proper  rates  to  be  charged  by  public 
service  corporations,  see  note  to 
Cedar  Rapids  Gas  Light  Co.  v. 
Cedar  Rapids,  48  L.  R.  A.  N.  S.  1048. 

3.  That  the  promoters  are  entitled 
to  reimbursement  for  their  legiti- 
mate expenses,  see  Emma  Silver 
Mining  Co.  v.  Grant,  L.  R.  11  Ch. 
Div.  918,  939;  Lydney  &  Wigpool 
Iron  Ore  Co.  v.  Bird,  L.  R.  33  Ch. 
Div.  85,  95,  24  Am.  &  Eng.  Corp. 


Gas.  23;  Bagnall  v.  Carlton,  L.  R. 
6  Ch.  Div.  371,  400,  404,  408 ;  In  re 
Leeds  &  Hanley  Theatres  of  Varie- 
ties, 1902,  2  Ch.  Div.  809,  826-827; 
Stickney  v.  Buckel,  6  Ont.  W.  R. 
751,  753 ;  In  re  Darby,  1911,  1  K.  B. 
95,  101,  80  L.  J.  K.  B.  Div.  180,  183. 
Cf.  Melhado  v.  Porto  Alegre  Ry. 
Co.,  L.  R.  9  C.  P.  Cas.  503,  507 ;  In  re 
National  Motor  Mail-Coach  Co., 
Ltd.,  1908,  2  Ch.  Div.  515,  and  see 
In  re  English  &  Colonial  Produce 
Co.,  Ltd.,  1906,  2  Ch.  Div.  435. 

4.  Cuba  Colony  Co.  v.  Kirby,  149 
Mich.  453,  458,  112  N.  W.  1133,  1135. 

This  is  so  though  the  act  of  in- 
corporation expressly  provides  for 
the  payment  of  the  expenses  by  the 
corporation.  Savin  v.  Hoylake  Ry. 
Co.,  L.  R.  1  Exch.  9. 

5.  Hinkley  v.  Sac  Oil  &  Pipe  Line 
Co.,  132  Iowa  396,  400,  107  N.  W. 
629,  631,  119  Am.   St.  R.  564.     See 
In  re   National    Motor    Mail-Coach 
Co.,  Ltd.,  1908,  2  Ch.  Div.  515. 

6.  See  Marchand  v.  Loan  &  Pledge 
Association,  26  La.  Ann.  389. 

7.  See  Marzetti's  Case,  28  Weekly 
Rep.  541. 


PROMOTION  EXPENSES.  153 

Emma  Silver  Mining  Co.  v.  Grant  8  was  an  action  to  compel 
the  defendant  Grant,  the  promoter  of  the  plaintiff  corporation,  to 
account  for  secret  profits  unlawfully  retained  by  him.  Grant 
claimed  that  he  was  entitled  to  credit  for  the  moneys  that  he  had 
disbursed  for  the  benefit  of  the  company.  It  appeared  that  he 
had  paid  a  sum  of  money  to  the  persons  by  whom  the  directors 
were  introduced,  had  furnished  shares  to  the  directors  and  paid 
large  sums  in  various  ways  to  brokers  for  sustaining  the  market, 
paid  £10,000  to  a  firm  of  brokers  for  waiving  an  option,  and 
paid  considerable  sums  to  persons  connected  with  the  press  for 
laudatory  statements  respecting  the  company  and  the  mine  which 
it  was  to  take  over.  It  was  claimed  that  these  payments  were 
immoral  and  improper  and  that  they  ought  not  be  allowed.  The 
court  held  that  the  amount  of  Grant's  profit  was  not  affected  by 
the  fact  that  some  of  the  payments  made  by  him  were  not  com- 
mendable, that  the  payments  were  made  in  good  faith  at  a  time 
when  he  believed  that  the  money  was  his  own,  and  that  the  profit 
for  which  he  should  be  made  to  account  was  the  net  profit  of  the 
transaction,  whether  or  not  the  method  in  which  the  transaction 
was  carried  on  received  the  approval  of  the  court.  The  court 
would,  apparently,  have  arrived  at  a  different  result  had  the  ques- 
tion arisen  in  a  suit  brought  by  the  promoter  to  recover  the 
amount  of  these  expenses,  instead  of  in  an  action  by  the  company 
to  recover  the  promoter's  unlawful  profits.  The  decision  should 
not,  in  any  event,  be  followed.9 

It  is  probable  that  extraordinary  and  unusual  expenses  of  a 
promotion  would  not  be  allowed  unless  the  subscribers  had  knowl- 
edge thereof.  The  subscribers  are  bound  to  know  that  a  corpo- 
ration cannot  be  organized  without  expense,  the  nature  and  ex- 
tent of  which  expense  depends  largely  upon  the  character  and 
scope  of  the  corporate  scheme.  It  is  therefore  no  hardship  upon 

8.  L.  R.  11  Ch.  Div.  918,  939-940.        24  Am.  &  Eng.  Corp.  Cas.  23 ;  In  re 

9.  See  Lydney  &  Wigpool  Iron  Ore      Faure  Electric  Accumulator  Co.,  L. 
Co.  v.  Bird,  L.  R.  33  Ch.  Dlv.  85,  95,      R.  40  Ch.  Dlv.  141,  156. 


154  THE  LAW  OF  PROMOTERS. 

the  subscribers  to  compel  them,  through  the  corporation,  to  bear 
their  share  of  the  cost  of  the  promotion.  If,  however,  there  are 
unusual  circumstances  which  necessitate  unusual  expenditures 
which  the  subscribers  cannot  be  expected  to  anticipate,  the  facts 
should  be  disclosed,  as  the  desirability  of  the  shares  is  necessarily 
lessened  if  an  unusual  portion  of  the  capital  is  devoted  to  pre- 
liminary expenses.10 

§  84.  Compensation  for  services. 

The  promoter  of  a  corporation  not  only  performs  the  labor  of 
organizing  the  corporation,  but  assumes  all  the  risks  incidental 
to  the  promotion.  He  frequently  enters  upon  contracts  which 
subject  him  to  heavy  personal  liability  in  case  the  corporation, 
after  its  organization,  refuses  to  assume  responsibility  therefor.11 
If  the  promotion  is  unsuccessful  and  the  corporation  proves  abor- 
tive, the  promoter  must  personally  bear  the  expenses,  and  can- 
not, in  the  absence  of  express  agreement,  hold  the  subscribers 
liable  for  any  part  thereof.12  While  it  is  quite  proper  that  a  pro- 
moter should  not  be  allowed  to  reap  any  secret  profit  from  his 
dealings  with  the  corporation,13  it  is  only  reasonable  that  after 
the  corporation  has  been  organized  and  has  obtained  the  full  benefit 
of  his  labors,  he  should  receive  from  it  not  only  reimburse- 
ment for  his  expenses,  but  compensation  for  his  services  as 
well.  It  is,  however,  held,  in  England  and  in  the  earlier  Amer- 
ican decisions,  that  no  compensation  can  be  allowed  the  promoter 
for  services  rendered  prior  to  the  creation  of  the  corporation,  for 
the  reason  that  the  plaintiff  could  not  have  been  employed  by 
the  corporation  before  it  achieved  legal  existence,  and  that  no 
contract  can  be  implied  as  of  a  time  when  the  corporation  was  in- 
capable of  making  one.14  It  is  true  that  the  promoter's  services 

10.  In  re  Ennis  &  West  Clare  Ry.  11.  See  ante,  §  77,  et  seq. 

Co.,  L.  R.  15  Ir.  180,  the  promoters'  12.  See  post,  §§  316,  319,  321. 

claim  for  reimbursement  for  interest  13.  See  post,  chap,  VI. 

on  moneys  borrowed  by  them  was  14.  Connecticut. — N.  Y.   &  N.   H. 

disallowed.  R.  R.  Co.  v.  Ketchum,  27  Conn.  170. 


PROMOTION  EXPENSES. 


155 


are  not  rendered  pursuant  to  any  contract  made  on  behalf  of 
the  corporation,  and  it  cannot  be  said  that  the  corporation,  by 


Illinois.— Rockford  R.  I.  &  St. 
L.  R.  R.  Co.  v.  Sage,  65  111.  328,  16 
Am.  Rep.  587. 

Kentucky. — Newport  &  Maysville 
R.  R.  Co.  v.  Hay,  8  Ky.  L.  R.  115. 

Louisiana. — Marchand  v.  Loan  & 
Pledge  Assn.,  26  La.  Ann.  389. 

New  Hampshire. — Low  v.  Conn.  & 
Pass.  Rivers  R.  R.,  45  N.  H.  370. 
Compare  same  case  on  later  appeal, 
46  N.  H.  284,  295. 

Pennsylvania. — Bell's  Gap  R.  R. 
Co.  v.  Christy,  79  Pa.  54,  21  Am. 
Rep.  39. 

Texas. — Weatherford,  etc.,  Ry.  Co. 
v.  Granger,  86  Tex.  350,  24  S.  W. 
795,  40  Am.  St.  R.  837,  overruling 
McDonough  v.  Bank  of  Houston,  34 
Tex.  309;  Jones  v.  Smith,  87  S.  W. 
210. 

Vermont. — Hall  v.  Vermont  & 
Mass.  R.  Co.,  28  Vt.  401,  406 ;  Secur- 
ity Co.  v.  Bennington  Monument 
Assn.,  70  Vt.  201,  206,  40  Atl.  43. 

United  Kingdom  and  Colonies. — 
In  re  National  Motor  Mail^Coach 
Co.,  Ltd.,  1908,  2  Ch.  Div.  515 ;  In  re 
English  &  Colonial  Produce  Co., 
Ltd.,  1906,  2  Ch.  Div.  435,  overruling 
In  re  Hereford,  etc.,  Waggon  &  En- 
gineering Co.,  L.  R.  2  Ch.  Div.  621. 
(Cf.  In  re  Manchester,  etc.,  Tram- 
ways Co.,  1893,  2  Ch.  Div.  638,  649- 
650).  See  Bagnall  v.  Carl  ton,  L.  R. 
6  Ch.  Div.  371,  391,  400,  404,  408. 

It  was  apparently  conceded  that  a 
claim  might  be  founded  on  a  sub- 
sequent promise.  See  Cushion  Heel 
Shoe  Co.  v.  Hartt,  181  Ind.  167,  103 
N.  E.  1063,  50  L.  R.  A.  N.  S.  979; 


Rockford  R  I.  &  St.  L.  R.  R.  Co.  v. 
Sage,  65  111.  328,  332,  16  Am.  Rep. 
587 ;  Low  v.  Conn.  &  Pass.  Rivers  R. 
R.,  46  N.  H.  284,  295-296;  Tanner  v. 
Sinaloa  Land  &  Fruit  Co.,  43  Utah 
14,  134  Pac.  586 ;  Hall  v.  Vt.  &  Mass. 
R.  R.  Co.,  28  Vt.  401,  406;  Rother- 
ham  Alum  &  Chemical  Co.,  L.  R.  25 
Ch.  Div.  103,  50  L.  T.  N.  S.  219; 
Touche  v.  Metropolitan  Ry.  Ware- 
housing Co.,  L.  R.  6  Ch.  App.  671; 
Re  Sale  Hotel  &  Botanical  Gardens, 
Ltd.,  78  L.  T.  N.  S.  368. 

Cf.  N.  Y.  &  N.  H.  R.  R.  Co.  v.  Ket- 
chum,  27  Conn.  170;  Melhado  v. 
Porto  Alegre  Ry.  Co.,  L.  R.  9  C.  P. 
503. 

A  corporate  note  given  in  payment 
for  a  promoter's  services  is  founded 
upon  a  sufficient  consideration. 
Smith  v.  New  Hartford  Water  Co., 
73  Conn.  626,  48  Atl.  754.  Cf.  N.  Y. 
&  N.  H.  R.  R.  Co.  v.  Ketchum,  27 
Conn.  170. 

Payments  for  such  services  vol- 
untarily made  by  the  corporation 
cannot  be  recovered  back.  Southern 
Hardwood  Lumber  Co.  v.  Scott,  46 
111.  App.  285.  ' 

Recovery  might,  under  the  author- 
ity of  some  of  these  cases,  be  had 
for  services  necessary  to  the  perfect- 
ing of  the  organization  of  the  com- 
pany, rendered  pursuant  to  the  re- 
quest of  a  majority  of  the  incorpora- 
tors  on  the  understanding  that  the 
corporation  would  pay  therefor. 
See  Farmers  Bai-k  of  Vine  Grove  v. 
Smith,  105  Ky.  816,  49  S.  W.  810,  88 
Am.  St.  Rep.  341,  and  cases  cited; 


156  THE  LAW  OF  PROMOTERS. 

adopting  the  benefit  of  the  services,  impliedly  agrees  to  pay 
therefor,  at  least  not  as  to  those  services  which  directly  relate  to 
the  creation  of  the  company  the  benefits  of  which  are  received  by 
the  company  at  the  very  moment  that  it  achieves  existence.  The 
corporation  cannot,  in  such  case,  be  said  to  have  entered  upon 
any  implied  agreement  to  compensate  the  promoter  for  his  serv- 
ices, for  the  corporation  is  at  the  time  that  it  receives  the  benefit 
of  these  services  incapable  of  making  a  contract.15  Such  services 
of  the  promoter  as  do  not  directly  affect  the  legal  organization 
of  the  corporation,  that  is,  such  as  relate  to  the  acquisition  of 
property  or  contract  rights,  the  benefit  of  which  services  may  be 
accepted  or  rejected  by  the  company  after  its  complete  organ- 
ization, stand  upon  a  different  basis.  It  may  well  be  said  that 
the  corporation,  by  accepting  the  benefits  of  these  services,  im- 
pliedly agrees  to  pay  the  reasonable  value  thereof  or  such  com- 
pensation as  may  to  the  knowledge  of  the  corporation  have  been 

Low  v.  Conn.  &  Pass.  Rivers  R.  R.,  Warehousing  Co.,  L.  R.  6  Ch.  App. 

45  N.  H.  370,  377 ;  Le  Grand  v.  Man-  671 ;  Re  Rotherham  Alum  &  Chemi- 

hattan   Mercantile   Ass'n,  80  N.    Y.  cal  Co.,  L.   R.  25  Ch.   Div.  103,  50 

638;    Tanner    v.    Sinaloa    Land    &  L.  T.  N.  S.  219;  Melhado  v.  Porto 

Fruit  Co.,  43  Utah  14,  134  Pac.  586,  Alegre  Ry.  Co.,  L.  R.  9  C.  P.  503; 

and  cases  cited ;  Hall  v.  Vt.  &  Mass.  In  re  Hereford,  etc.,  Waggon  &  En- 

R.  Co.,  28  Y$.  401,  406-407.  gtneering  Co.,  L.  R.  2  Ch.  Div.  621, 

Cf.  In  re  English  &  Colonial  Pro-  624,  35  L.  T.  N.  S.  40.  And  see  Til- 
duce  Co.,  Ltd.,  1906,  2  Ch.  Div.  435,  son  v.  Warwick  Gas  Light  Co.,  4  B. 
overruling  In  re  Hereford,  etc.,  &  C.  962;  In  re  Brampton  &  Long- 
Waggon  &  Engineering  Co.,  L.  R.  town  Ry.  Co.,  L.  R.  10  Ch.  App.  177 ; 
2  Ch.  Div.  621.  Hitchins  v.  Kilkenny,  etc.,  Ry.  Co., 

As  to  the  foundation  of  a  claim  9  C.  B.  536.    And  see  ante,  §  49,  and 

for  compensation  upon  the  act,  or  post,  §  87n. 
articles  of  incorporation,  see :  15.  See   post,    §§    87-88.     For    a 

Weatherford,     etc.,     Ry.     Co.     v.  discussion  of  a  similar  question  see 

Granger,  86  Tex.  350,  357,  24  S.  W.  ante,  §  58.     And  see  Cushion  Heel 

795,   40   Am.    St.    R.   837;    Jones   v.  Shoe  Co.  v.  Hartt,  181  Ind.  167,  103 

Smith,  (Tex.),  87  S.  W.  210;  Garden  N.  E.  1063,  50  L.  R.  A.  N.  S.  979, 

v.  General  Cemetery  Co.,  5  Bing.  N.  quoting  10  Cyc.  265. 
C.  253;  Touche  v.  Metropolitan  Ry. 


PROMOTION  EXPENSES.  157 

agreed  upon  by  the  promoter.16  The  fact  that  it  is  difficult  to 
fasten  upon  the  corporation  any  contract  to  pay  for  those  serv- 
ices of  the  promoter  which  are  accepted,  if  at  all,  at  the  moment 
of  its  legal  creation,  is  no  reason  for  denying  the  promoter  rea- 
sonable compensation  therefor.  Contracts  made  before  the  organ- 
ization of  the  corporation  fixing  the  amount  to  be  paid  the  pro- 
moter for  services  of  this  character  are  not,  and  do  not  after  its 
organization  become,  binding  upon  the  corporation.  Justice, 
however,  requires  the  payment  to  the  promoter  of  reasonable  com- 
pensation for  his  services,  and  this  should  be  allowed  regardless  of 
the  technical  difficulty  of  fastening  upon  the  company  any  im- 
plied promise  to  pay  the  same.  Recent  cases  in  America  have, 
without  extended  discussion,  stated  in  broad  terms  that  the 
promoter  is  entitled  to  reasonable  compensation  for  his  serv- 
ices.17 

Compensation  for  services  will  not  be  allowed  a  promoter  who 
has  stated  to  his  associates,  or  allowed  them  to  understand,  that 

16.  See  ante,  §  56,  et  seq.    But  see  Cadena  DeCobre  Min.  Co.,  13  Ariz. 
§  59.  52,  66,  108  Pac.  231,  236,  where  the 

17.  Dickerman  v.  Northern  Trust  court    concluded    that    no    services 
Co.,  176  U.  S.  181,  205-206,  20  Sup.  had  been  rendered. 

Ct.   311,   44   L.   Ed.   423;   Caffee   v.  The  services  must,  to  entitle  the 

Berkley,  141  Iowa  344,  347,  118  N.  promoter     to     compensation,     have 

W.  267,  268 ;   Mason  v.  Carrothers,  been    "  necessary    and    reasonable." 

105  Me.  392,  410,  74  Atl.  1030,  1037-  Low  v.  Conn.  &  Pass.  Rivers  R.  R., 

1038 ;    Third   Ward   Bldg.    Ass'n   v.  45  N.  H.  370,  377-378. 

Lotze,    9    Ohio    Dec.    Rep.    248,    11  If    the    promoter    is    himself   the 

Weekly  Law  Bui.  285;   Bigelow  v.  owner  of   property   which   the  cor- 

Old  Dominion  Copper,  etc.,  Co.,  74  poration   is  organized   to   purchase, 

N.  J.  Eq.  457,  501,  71  Atl.  153;  Hoi-  and  his  services  in  organizing  the 

combe  v.  Trenton  White  City  Co.,  80  corporation  are  therefore  largely  in 

N.  J.  Eq.  122,  155,  82  Atl.  618,  632.  his   own   interest,   his   right   to   re- 

Cf.    Cushion    Heel    Shoe    Co.    v.  ceive    compensation    from    the    cor- 

Hartt,  181  Ind.  167,  103  N.  E.  1063,  poration     is     somewhat     doubtful. 

50  L.   R.  A.  N.   S.  979 ;  Tanner  v.  Tanner  v.  Sinaloa  Land  &  Fruit  Co., 

Sinaloa  Land  &  Fruit  Co.,  43  Utah  43  Utah  14,  134  Pac.  586. 
14,   134  Pac.  586;   also  Hughes  v. 


158 


THE  LAW  OF  PROMOTERS. 


no  allowance  for  promotion  expenses  is  to  be  made,18  or  who  ren- 
dered his  services  without  expectation  of  payment.19 

The  promoter's  right  to  compensation  for  services  will  neces- 
sarily be  determined  in  the  light  of  the  enterprise  which  he  pro- 
motes. If  the  enterprise  is  a  small  one,  consisting  of  but  few 
stockholders,  and  resembling  a  partnership  under  corporate  guise, 
it  may  readily  be  inferred  that  the  promoter  did  not  expect  to 
be  paid  for  his  services,  but  looked  to  the  success  of  the  enter- 
prise for  his  compensation.20  If,  on  the  other  hand,  the  enter- 


18.  Federal. — Ritchie  v.  McMul- 
len,  79  Fed.  Rep.  522,  553-554,  25  C. 
C.  A.  50,  47  U.  S.  App.  470.  (Petition 
for  writ  of  certiorari  denied,  168 
U.  S.  710,  42  L.  Ed.  1212,  18  Sup.  Ct. 
045),  affirming,  on  this  point,  64 
Fed.  Rep.  253,  258-259. 

Georgia. — Powell  v.  Georgia  F.  & 
A.  Ry.  Co.,  121  Ga.  803,  49  S.  E.  759. 

Michigan. — Cuba  Colony  Co.  v. 
Kirby,  149  Mich.  453,  112  N.  W. 
1133. 

Mississippi. — West  Point  Tel.  & 
Tel.  Co.  v.  Rose,  76  Miss.  61,  23  So. 
629. 

Ohio. — Third  Ward  Bldg.  Assn. 
v.  Lotze,  9  Ohio  Dec.  Reprint,  248, 
11  W.  L.  Bull.  285. 

United  Kingdom  and  Colonies. — 
Savin  v.  Hoylake  Ry.  Co.,  L.  R.  1 
Exch.  9. 

The  representations  of  the  pro- 
moter's partners  are  binding  upon 
him  and  a  bar  to  his  recovering 
compensation.  Tanner  v.  Sinaloa 
Land  &  Fruit  Co.,  43  Utah  14,  134 
Pac.  586. 

A  by-law  of  a  corporation  provid- 
ing that  none  of  its  "  officers  "  shall 
receive  any  compensation  for  ser- 
vices has  been  held  to  have  no  bear- 


ing upon  the  question  of  the  pro- 
moter's compensation.  Fitzpatrick 
v.  O'Neill,  43  Mont.  552,  118  Pac. 
273,  Am.  &  Eng.  Ann.  Gas.,  1912  C. 
296. 

19.  Lindsey    v.    Pasco    Power    & 
Water  Co.,  203  Fed.   Rep.  251,  121 
C.   C.   A.   449;    Hinkley   v.    Sac   Oil 
&  Pipe  Line  Co.,  132  Iowa  396,  400, 
107  N.  W.  629,  €31,  119  Am.  St.  R. 
564 ;  Low  v.  Conn.  &  Pass.  Rivers  R. 
R.,  45  N.  H.  370,  377-378,  384 ;  In  re 
Eddystone  Marine  Ins.  Co.,  1893,  3 
Ch.  Div.  9,  14;   Third  Ward  Bldg. 
Assn.    v.    Lotze,   9   Ohio   Dec.    Rep. 
248,  11  Weekly  Law  Bui.  285. 

20.  See  Baily   v.   Burgess,  48  N. 
J.  Eq.  411,  22  Atl.  733,  where  the 
court  held   that  the  promoter   was 
not   entitled   to   compensation   "  for 
the   reason   that   it   was   a   mutual 
effort  upon  the  part  of  the  Rowlands 
and  Burgess  (the  promoter  claiming 
compensation)    to  organize  a   com- 
pany.   This  was  part  of  the  work  to 
that    end.      Mr.    Rowlands    was    to 
furnish  the  money  and  Mr.  Burgess 
was    to    secure    the   title   and    dis- 
charge the  liens,  and  the  company, 
of  which  they  were  members,  was  to 
have  the  benefit  thereof." 


PROMOTION  EXPENSES. 


159 


prise  is  an  extensive  one,  and  the  corporation  is  organized  with  a 
large  capitalization  and  a  great  number  of  stockholders,  and  the 
promoter's  interest  represents  only  a  small  proportion  of  the 
total  capital,  the  presumption  is  strong  that  the  promoter  ex- 
pected not  only  to  reap  a  profit  from  his  investment  in  the  shares, 
but  to  be  paid  for  his  promotion  services  as  well. 

For  services  rendered  after  he  has  become  a  director  of  the 
corporation,  the  promoter  is  not  entitled  to  compensation  unless 
pursuant  to  an  express  agreement  to  that  effect,'1  except,  per- 
haps, if  the  services  are  of  a  character  not  within  the  ordinary 
duties  of  a  director.22 

§  85.  Compensation  of  fraudulent  promoters. 

Whether  the  promoter's  right  to  compensation  for  services  may 
be  defeated  by  showing  that  he  has  committed  a  fraud  upon  the 
company,  or  unlawfully  taken  a  secret  profit  upon  the  promotion, 
is  a  question  upon  which  the  authorities  do  not  agree.  In  some 
cases  promoters  compelled  to  account  for  secret  profits  have  been 
allowed  to  offset  against  such  profits  the  fair  value  of  their  serv- 
ices upon  the  promotion.23  Other  cases  hold,  with  better  reason, 
that  a  promoter  who  commits  a  fraud  upon  the  company,  fails  in 
the  discharge  of  his  duties,  and  is  not  entitled  to  compensation.24 


21.  New  York  &  New  Haven  R. 
R.  Co.   v.   Ketchum,  27  Conn.   170; 
Hall   v.   Vt.  &  Mass.   R.   R.  Co.,  28 
Vt.  401,  409;  Merchants  Fire  Office, 
Ltd.,    v.    Armstrong,    1901    Weekly 
Notes  163.     See  also  Cook  on  Cor- 
porations,    §     657;     Thompson     on 
Corporation     (2nd     Ed.),     §     1715; 
Clark  &  Marshall,  on  Private  Cor- 
porations, §  671. 

22.  See  N.  Y.  &  N.  H.  R.  R.  Co. 
v.    Ketchum,    27    Conn.    170,    181; 
Rockford  R.  I.  &  St.  L.  R.  R.  Co.  v. 
Sage,  65  111.  328,  332,  16  Am.  Rep. 


587;  Cook  on  Corporations,  §  657; 
Thompson  on  Corporations  (2nd 
Ed.),  §  1715;  Clark  &  Marshall  on 
Private  Corporations,  §  671. 

23.  Mason  v.  Carrothers,  105  Me. 
392,  410,  74  Atl.  1030,  1037-1038,  see 
also   Caffee   v.    Berkley,    141   Iowa, 
344,  347,  118  N.  W.  267,  268. 

24.  Davis   v.    Las   Ovas  Co.,   227 
U.  S.  80,  33  Sup.  Ct.  197,  57  L.  Ed. 
426,    affirming,     Las    Ovas    Co.     v. 
Davis,    35   App.   Cas.   Dist.   of  Col. 
372;    Dunlap   v.   Twin   City   Power 
Co.,   226   Fed.    Rep.   161,   —   C.   C. 


160 


THE  LAW  OF  PROMOTERS. 


Different  considerations  might  arise  if  the  promoter's  fraud 
were  a  technical  one,  and  it  appeared  that  he  had  acted  in  good 
faith  throughout.25 

A  promoter  who  retains  a  secret  profit  is  certainly  not  en- 
titled to  receive  additional  compensation  for  services,  and  securi- 
ties issued  to  him  in  payment  for  services  may  be  cancelled  upon 
the-discovery  of  the  fact  that  he  has  himself  fixed  and  taken  his 
compensation.26 

§  86.  Compensation  for  services  in  obtaining,  subscriptions. 

The  obtaining  of  subscriptions  to  the  capital  stock  of  the  cor- 
poration is  often  a  necessary  step  in  the  promotion,  and  the  pro- 
moter's services  in  procuring  such  subscriptions  may  according 
to  the  weight  of  authority  be  taken  into  consideration  in  fixing 
his  compensation.27 


A.  — ;  Hitchcock  v.  Hustace,  14 
Hawaii  232,  244;  Bagnall  v.  Carl- 
ton,  L.  R.  6  Ch.  Div.  371,  391 ;  In  re 
Hereford  &  South  Wales  Waggon  & 
Engineering  Co.,  L.  R.  2  Ch.  Div. 
621,  35  L.  T.  N.  S.  40 ;  Re  Sale  Hotel 
and  Botanical  Gardens,  Ltd.,  77  L. 
T.  N.  S.  681,  reversed  on  other 
grounds,  78  L  T.  N.  S.  368. 

The  promoters  were  allowed  to 
offset  their  expenses  against  their 
liability  for  unlawful  profits  in 
Hayward  v.  Leeson,  176  Mass.  310, 
322-323,  57  N.  E.  656,  49  L.  R.  A. 
725;  Lydney  &  Wigpool  Iron  Ore 
Co.  v.  Bird,  L.  R.  33  Ch.  VDiv.  85,  95, 
24  Am.  &  Eng.  Corp.  Cas.  23;  In  re 
Leeds  &  Hanley  Theatres  of  Varie- 
ties, 1902,  2  Ch.  Div.  809,  826-827; 
In  re  Darby,  1911,  1  K.  B.  95,  101 ; 
80  L.  J.  K.  B.  Div.  180,  183 ;  Emma 
Silver  Min.  Co.  v.  Grant,  L.  R.  11 
Ch.  Div.  918. 


25.  Richlands  Oil  Co.  v.  Morriss, 
108  Va.  288,  298,  61  S.  E.  762,  765. 

26.  Crowe  v.  Malba  Land  Co.,  76 
N.  Y.  Misc.  676,  135  Supp.  454. 

27.  Federal. — See   Commonwealth 
S.  S.  Co.  v.  American  Ship  Building 
Co.,   197   Fed.   Rep.   797,   814,   aff'd, 
215  Fed.   Rep.  296,  304,  131  C.   C. 
A.  596. 

California. — See  Western  States 
Life  Ins.  Co.  v.  Lockwood,  166  Cal. 
185,  194,  135  Pac.  496,  500. 

Illinois. — Ross  v.  Sayler,  104 
111.  App.  19,  citing  Rockford  R.  I.  & 
St.  L.  R.  R.  Co.  v.  Sage,  65  111.  328, 
16  Am.  Rep.  587. 

Indiana. — Cincinnati  Ind.  &  Chi. 
R.  R.  Co.  v.  Clarkson,  7  Ind.  595. 

Kentucky. — Farmers  Bank  of  Vine 
Grove  v.  Smith,  105  Ky.  816,  49  S. 
W.  810,  88  Am.  St.  Rep.  341. 

New  Hampshire. — Low  v.  Conn.  & 
Pass.  Rivers  R.  R.,  45  N.  H.  370, 
377-^378. 


PROMOTION  EXPENSES. 

The  court  in  Lydney  &  Wigpool  Iron  Ore  Co.  v.  Bird  28  said 
that  it  was  "  wholly  wrong  to  make  the  company  pay  for  the 
issue  of  its  own  shares.     No  part  of  the  capital  of  the  company 
could  be  properly  so  applied."     In  Metropolitan  Coal  Consumers 
Association  v.  Scrimgeour,29  the  court  said  that  this  statement  f 
had  application  to  the  circumstances  of  the  particular  case,  and   ; 
held  that  an  agreement  to  pay  a  firm  of  stock  brokers  a  commission 
upon  the  sale  of  the  company's  shares  was  proper. 

While  the  promoters  may  be  allowed  compensation  for  their 
services  in  selling  the  company's  shares,  they  cannot  properly 
claim  commissions  for  their  services  in  securing  agents  to  sell 
these  shares.30 

§  87.  Amount  of  compensation  by  whom  fixed. 

When  it  is  said  that  the  promoters  are  entitled  to  reasonable 
compensation  for  their  services  upon  the  promotion,  that  does 
not  mean  that  they  may  themselves  fix  the  amount  of  their  com- 
pensation and  take  it  from  the  funds  of  the  corporation.31  It  is 

Vermont. — Hall  v.  Vt.  &  Mass.  R.  In  re  Faure   Electric  Accumulator 

Co.,  28  Vt.  401.  Co.,  L.  R.  40  Ch.  Div.  141. 

United  Kingdom   and   Colonies. —  29.  1895,  2  Q.   B.  Div.   604,  607— 

Stickney   v.    Buckel,   6   Ont.   W.   R.  608,  609.     Cf.  In  re  Faure  Electric 

751,  753.  Accumulator  Co.,  L.  R.  40  Ch.  Div, 

As   to    banking   corporations,   see  141. 

Tift  v.  Quaker  City  Natl.  Bk.,  141  See  Cook  on  Corporations,  §42; 

Pa.  550,  21  Atl.  660,  38  Am.  &  Eng.  Clark   &   Marshall   on   Priv.   Corp., 

Corp.    Cas.    339,    citing    Taylor    on  §  390g. 

Corporations,  §  86.  30.  Stickney  v.  Buckel,  6  Ont.  W. 

In  England  a  commission  may,  by  R.,  751,  but  see  Richlands  Oil  Co.  v. 

statute,  be  paid  for  procuring  sub-  Morriss,  108  Va.  288,  298,  61  S.  E. 

scriptions,   if  such   payment  is  au-  762,  765. 

thorized  by  the  Articles.    Companies  31.  Dickerman  v.  Northern  Trust 

(Consolidation)    Act  of  1908,   §   89.  Co.,  176  U.  S.  181,  205-206,  20  Sup. 

In  re   Worthington,   1914,   2   K.   B.  Ct.  311,  44  L.  Ed.  423;  Hay  ward  v. 

299,  83  L.  J.  K.  B.  885,  110  L.  T.  N.  Leeson,   176  Mass.   310,  320,   57  N. 

S.  599.  E.  656,  660,  49  L.  R.  A.  725 ;   Scott 

28.  L.  R.  33  Ch.  Div.  85,  95,  24  v.  Farmers,  etc.,  Natl.  Bank,  97  Tex. 

Am.  &  Eng.  Corp.  Cas.  23.    And  see  31,  53-54,  75  S.  W.  7,  104  Am.  St. 


162  THE  LAW  OF  PROMOTERS. 

for  the  corporation,  and  not  for  the  promoters,  to  determine  the 
latter's  compensation.32 

A  contract  made  before  the  organization  of  the  company  fixing 
the  amount  of  the  promoter's  compensation  is  not  binding  upon 
the  company  unless  the  obligations  thereof  are  assumed  by  the 
fully  organized  company,33  and  the  fact  that  the  company  has 
received  the  benefit  of  the  services  rendered  pursuant  to  the  terms 
of  the  contract,  does  not  necessarily  obligate  it  to  pay  the  com- 
pensation named  therein.  If,  as  may  sometimes  be  the  case,  the 
services  of  the  promoter  are  directed  to  the  legal  organization  of 
the  corporation,  and  the  benefit  of  his  services  received  by  the  cor- 
poration is  the  achievement  of  its  legal  existence,  such  benefit  is 
received  by  it  at  a  time  when  it  is  still  incapable  of  making  a  con- 
tract, and  no  implied  promise  to  pay  the  agreed  amount  of  the 
promoter's  compensation  can  be  implied  from  its  receiving  the 
benefit  of  his  services.34 

As  the  promoter  has,  according  to  the  weight  of  recent  au- 
thority, an  enforceable  claim  against  the  corporation  for  the 
reasonable  value  of  his  services  upon  the  promotion,35  there  is  no 
reason  why  his  compensation  should  not  be  adjusted  and  paid  by 
the  directors.36  The  action  of  the  directors  in  fixing,  the  corn- 
Rep.  835;  see  Re  Sale  Hotel  &  Rep.  566,  24  Supp.  573,  that  a  pro- 
Botanical  Gardens,  Ltd.,  78  Law  moter  should  not  be  compelled  to 
Times  N.  S.  368.  furnish  a  bill  of  particulars  setting 

See  note  38,  infra.  forth  an  itemized  statement  of  the 

32.  McKay's   Case,   L.    R.   2   Ch.      services  rendered  by  him. 

Div.  1,  3,  note.  36.  See     Hearther     v.     Southern 

33.  McDonough  v.  Bank  of  Hous-  Power  &  Milling  Co.,  16  Pa.  Dist.  Ct. 
ton,  34  Tex.  309.    See  Gunn  v.  Lon-  198.    See  also  De  La  Motte  v.  North- 
don  &  Lancashire  Fire  Ins.  Co.,  12  western   Clearance   Co.,    126   Minn. 
Com.  Bench  N.  S.   694;  also  In  re  197,  148  N.  W.  47;  and  see,  though 
Englefield  Colliery  Co.,  L.  R.  8  Ch.  hardly  in  point,  Porch  v.  Agnew  Co., 
Div.  388.  70  N.   J.   Eq.  328,  332-336,  61  Atl. 

34.  See  §§  84,  88,  58.  721,  affirmed,  71  N.  J.  Eq.  305,  65 

35.  See  ante,  §  84.  AtL    485,    and    Re    Sale    Hotel    & 
It  was  held  in  Fry  v.  Manhattan      Botanical  Gardens,  Ltd.,  78  L.  T.  N. 

Trust  Co.,  4  N.  Y.  Misc.  611,  53  St      S.  368. 


PROMOTION  EXPENSES. 


163 


pensation  of  the  promoter  is,  of  course,  ineffective  if  it  appears 


But  see  the  statement  in  Cook  on 
Corporations,  §  651,  quoted  in  Rich- 
lands  Oil  Co.  v.  Morriss,  108  Va. 
288,  294,  61  S.  E.  762,  764,  that  "  it  is 
not  legal  for  promoters  to  cause 
the  board  of  directors  to  vote  stock 
to  such  promoters  for  services  al- 
ready performed." 

The  resolution  of  the  directors  to 
compensate  the  promoter  for  his 
services  is  ineffective  if  one  of  the 
directors  has,  unknown  to  his  fel- 
lows, obtained  an  agreement  from 
the  promoter  to  share  in  such  com- 
pensation. De  La  Motte  v.  North- 
western Clearance  Co.,  126  Minn. 
197,  148  N.  W.  47. 

The  directors  may,  of  course,  pay 
the  promoters'  compensation,  if  such 
compensation  is  fixed  by  the  articles 
of  association,  (Croskey  v.  Bank  of 
Wales,  4  Giff.  314),  or  if  the  articles 
of  association  expressly  confer  such 
power  upon  the  directors.  See  Bank 
of  Turkey  v.  Ottoman  Co.,  L.  R.  2 
Eq.  366,  14  L.  T.  N.  S.  884 ;  Re  Sale 
Hotel  &  Botanical  Gardens,  Ltd.,  78 
L.  T.  N.  S.  368.  And  see  ante,  §  49. 

The  payment  is  not  justified  by 
the  articles  of  association,  if  the 
articles  assume  to  name  as  the  pro- 
moter, one  who  is  in  fact  a  mere 
dummy  to  receive  the  "compensation 
for  the  real  promoters  whose  iden- 
tity is  concealed.  Ex  parte  Preston, 
37  L.  J.  Ch.  N.  S.  618,  19  L.  T.  N.  S. 
138.  The  payment  to  the  promoter 
is  unlawful  if  a  part  thereof  is, 
under  a  secret  agreement,  paid  to 
the  directors.  Ex  parte  Williams, 
L.  R.  2  Eq.  216. 

Stock  of  mining  companies  issued 


in  payment  of  promoters'  services  or 
disbursements  must  under  the 
Nevada  statute  be  stamped  "  Pro- 
motion Stock,"  Ch.  56,  Statutes  of 
1909,  State  ex  rel.  Moore  v.  Manhat- 
tan Verde  Co.,  32  Nev.  474,  109  Pac. 
442. 

It  has  been  held  that  shares  can- 
not be  lawfully  issued  for  pro- 
moters' services  under  a  statute  pro- 
viding that  "  no  corporation  shall 
issue  either  stocks  or  bonds,  except 
for  money,  labor  done  or  property 
actually  received."  Herbert  v.  Dur- 
yea,  34  N.  Y.  App.  Div.  478,  54  Supp. 
311,  affirmed  without  opinion,  164 
N.  Y.  596,  58  N.  E.  1088;  Stevens  v. 
Episcopal  Church  History  Co.,  140 
^N.  Y.  App.  Div.  570,  582,  125  Supp. 
573;  Lamphere  v.  Lang,  157  N.  Y. 
App.  Div.  306,  141  Supp.  967,  (re- 
versed on  another  ground,  213  N.  Y. 
585,  108  N.  E.  82).  See  also  Mc- 
Allister v.  American  Hospital  Ass'n, 
62  Or.  530,  125  Pac.  286.  Cf.  Cali- 
vada  Col.  Co.  v.  Hays,  119  Fed.  Rep. 
202;  In  re  Ballou  215  Fed.  Rep.  810 ; 
De  La  Motte  v.  Northwestern  Clear- 
ance Co.,  126  Minn.  197,  148  N.  W. 
47;  Fitzpatrick  v.  O'Neill,  43  Mont. 
552,  563,  118  Pac.  273,  276,  Am.  & 
Eng.  Ann.  Gas.  1912,  C.  296,  and  cases 
cited;  Holcombe  v.  Trenton  White 
City  Co.,  80  N.  J.  Eq.  122,  155, 
82  Atl.  618,  632 ;  Herbert  v.  Uhl,  66 
Hun  (N.  Y.)  626,  20  Supp.  743. 

A  payment  made  under  a  mistake 
as  to  the  services  rendered  gives 
rise  to  a  legal  demand,  and  relief 
cannot  be  had  in  equity.  Bank  of 
Turkey  v.  Ottoman  Co.,  20  L.  T.  N. 
S.  220. 


164  THE  LAW  OF  PROMOTERS. 

that  the  directors  were  subject  to  the  domination  of  the  pro- 
moter.37 If  there  is  any  doubt  as  to  the  entire  independence  of 
the  board  of  directors,  the  determination  of  the  promoter's  com- 
pensation should  be  left  to  the  stockholders.38  A  corporation  is, 
however,  ordinarily  to  be  managed  by  its  board  of  directors,  and 
not  by  its  stockholders,  and  the  effect  of  a  vote  of  the  stockhold- 
ers, unaccompanied  by  any  action  on  the  part  of  the  directors,  is 
open  to  serious  question.39 

It  has  been  held  that  directors  who,  without  proper  scrutiny 
and  without  the  exercise  of  a  fair  discretion,  pay  to  the  promoter 
compensation  to  which  he  is  not  entitled,  are  jointly  and  severally 
liable  to  the  company  for  the  moneys  so  paid  out.40  If  the  pro- 
moters' services  were  rendered  without  expectation  of  payment, 
and  the  directors,  desiring  to  distribute  stock  without  consider- 
ation, issue  shares  ostensibly  in  payment  for  services  rendered 
upon  the  promotion,  such  shares  may  be  treated  as  issued  without 
consideration  and  the  owners  held  for  the  par  value  thereof  in  case 
of  the  insolvency  of  the  company.41 

37.  See  post,  §  110.  And    see   note    to    Fitzpatrick   v. 

38.  Fitzpatrick     v.      O'Neill,     43      O'Neill,  Am.  &  Eng.  Ann.  Cas.  1912, 
Mont.  552,  118  Pac.  273,  Am.  &  Eng.      C.  296,  300. 

Ann.  Cas.  1912,  C.  296.  See    Thompson    on    Corporations 

The     voting     by     the     promoters  (2nd   Ed.),    §   1184?   Cook   on   Cor- 

themselves    of    proxies    for    a    ma-  porations,  §  709;  Clark  &  Marshall 

jority  of  the  shares,  upon  the  reso-  on  Private  Corporations,  §  627. 

lution  by  which  their  compensation  40.  In  re  Englefield  Colliery  Co., 

is  fixed,  has  been  said  to  be  a  badge  L.  R.  8  Ch.  Div.  388 ;  In  re  Anglo 

of  fraud.     Gaines  v.  McAllister,  122  French   Co-op.    Soc.    L.    R.    21    Ch. 

N.  C.  340,  29  S.  E.  844.  Div.  492,  496;    Marzetti's  Case,   28 

39.  Plaquemines    Tropical    Fruit  Weekly  Rep.   541 ;    Merchants   Fire 
Co.  v.  Buck,  52  N.  J.  Eq.  219,  238,  Office,     Ltd.,     v.     Armstrong,     1901 
27  Atl.  1094,   1101,  44  Am.  &  Eng.  Weekly  Notes   163,   and   see  In  re 
Corp.     Cas.     686;     Gaines     v.     Me-  Faure  Electric  Accumulator  Co.,  L. 
Allister,    122    N.    C.    340,    29    S.    E.  R.  40  Ch.  Div.  141. 

844.      And    see   post,    §    llln.     Cf.  Cf.    General    Exchange    Bank    v. 

Fitzpatrick     v.     O'Neill,     43    Mont.  Homer,  L.  R.  9  Eq.  480. 

552,   563,  118  Pac.  273,  276  Am.  &  41.  In  re  Eddystone  Marine  Ins. 

Eng.   Ann.   Cas.   1912,   C.   296,   and  Co.,  1893,  3  Ch.  Div.  9. 
authorities  cited. 


PROMOTION  EXPENSES.  165 

§  88.  Compensation  of  persons  employed  by  the  promoters. 

Persons  employed  by  the  promoters  to  render  legal  or  other 
services  in  the  organization  of  the  corporation  are,  in  the  ab- 
sence of  an  agreement  to  the  contrary,  entitled  to  receive  compen- 
sation from  the  promoters.42  The  amount  paid  as  such  compen- 
sation may,  if  the  services  were  necessary  and  proper  and  the 
compensation  reasonable,  be  charged  to  the  corporation  by  the 
promoters  as  a  disbursement  incurred  in  its  organization.43 

Persons  rendering  services  under  an  employment  by  the  pro- 
moters should  not  ordinarily  be  allowed  to  recover  compensation 
directly  from  the  corporation.  The  authorities  on  this  point  are 
not  altogether  satisfactory.  The  rule  just  stated  seems  to  be  sus- 
tained by  a  line  of  English  cases  based  to  some  extent  upon  statu- 
tory provisions.44  Cases  may  be  found  both  in  England  and  in 
this  country  in  which  the  courts  sustained  suits  brought  against 
the  corporation  by  employees  of  the  promoters,  without  making 
any  reference  to  the  rule  that  such  compensation  should  be  sought 
from  the  promoters.45  Both  justice  and  simplicity  of  procedure 

42.  In  re  Hereford,  etc.,  Waggon  ford,    etc.,    Waggon    &    Engineering 
&  Engineering  Co.,  L.  R.  2  Ch.  Div.  Co.,  L.  R.  2  Ch.  Div.  621,  627,  35  L. 
621,  627,  35  L.  T.  N.  S.  40,  and  see  T.    N.    S.    40)  ;    Dundee    Suburban 
ante,  §§  77-78,  and  post,  §  316.  Railway,  10  Scots  Law  Times  253, 

43.  See  ante,  §§  82-83.  257;    Muir    v.    Forman's    Trustees, 

44.  In  re   Skegness   &   St.   Leon-  Sess.  Cas.  5  Fraser  546,  577,  affirm- 
ard's  Tramways  Co.,  L.  R.  41  Ch.  ing,   Muirkirk,   etc.,   Rys.,   10   Scots 
Div.  215,  where  the  authorities  are  Law  Times  247,  249. 

reviewed;    In   re   Manchester,   etc.,  Cf.    Moneypenny    v.    Hartlaad,    1 

Tramways  Co.,  1893,  2  Ch.  Div.  638,  Car.  &  P.  352. 

648;  Re  Rotherham  Alum  &  Chemi-  45.  Colorado. — Freeman  Imp.  Co. 

cal  Co.,  L.  R.  25  Ch.  Div.  103,  50  L.  v.    Osborn,    14    Colo.    App.   488,    60 

T.  N.  S.  219 ;  Hume  v.  Record  Reign  Pac.  730. 

Jubilee    Syndicate,   80   L.   T.   N.    S.  Missouri. — Taussig   v.    St.    Louis, 

404;  In  re  Kent  Tramways  Co.,  L.  etc.,  Ry.  Co.,  166  Mo.  28,  38,  65  S. 

R.,  12  Ch.  Div.  312;  Wyatt  v.  Met-  W.  969,  971,  89  Am.  St.  Rep.  674; 

ropolitan  Board  of  Works,  11  C.  B.  same  v.  same,  186  Mo.  269,   85   S. 

N.  S.  744;  In  re  English  &  Colonial  W.  378. 

Produce  Co.,  1906,  2  Ch.  Div.  435,  Ohio.— Third   Ward    Bldg.    Assoc. 

(disapproving  a  dictum  in  Re  Here-  v.  Lotze,  9  Ohio  Dec.  Reprint  248, 


THE  LAW  OF  PROMOTERS. 

are,  however,  ordinarily  better  served  by  compelling  one,  who 
rendered  services  under  an  employment  by  the  promoters,  to  seek 
his  compensation  from  his  employers,  and  by  allowing  only  those 
to  recover  directly  from  the  corporation  who  have  no  one  else  to 
whom  they  may  look  for  payment. 

One  rendering  services  under  employment  by  the  .promoters  may 
recover  his  compensation  from  the  corporation  if  the  act  of  in- 
corporation provides  that  such  expenses  shall  be  paid  by  it.46 
The  intent  of  the  statute  must,  however,  be  clearly  expressed, 
as  it  will  otherwise  be  interpreted  as  intending  payment  in  the 
first  instance  by  the  promoters  and  their  reimbursement  by  the 
corporation.47 

A  suit  against  the  corporation  may  be  maintained  by  one  who 
rendered  services  under  an  agreement  with  the  promoters  that  he 
should  be  compensated  by  the  corporation ;  provided  that  the  cor- 
poration after  its  organization  agreed  to  be  bound  by  the  terms 
of  the  promoters'  contract.48 

A  promoter  rendering  professional  services  upon  the  organiz- 
ation of  a  company  has  ordinarily  no  right  of  recovery  against 

11  Weekly  Law  Bulletin  285 ;  City  Ch.  Div.  215 ;  In  re  Kent  Tramways 

Bldg.  Assoc.  v.  Zahner,  6  Ohio  Dec.  Co.,  L.  R.  12  Ch.  Div.  312 ;  Wyatt  v. 

Reprint  1068,  10  Am.   Law  Record  Metropolitan    Board   of   Works,    11 

181.  C.  B.  N.  S.  744;  Dundee  Suburban 

Pennsylvania. — Merchants'     Natl.  Ry.,  10  Scots  Law  Times  253,  257; 

Bank  v.  Eckels,  191  Pa.  372,  43  Atl.  Muir    v.    Forman's    Trustees    Sess. 

245.  Cas.,   5   Fraser   546,   577,   affirming, 

United  Kingdom  and  Colonies. —  10  Scots  Law  Times  247,  249. 

Terrell  v.  Hutton,  4  H.  L.  Cas.  1091,  48.  McDonough  v.  Bank  of  Hous- 

reversing  Terrell's  Case,  2  Sim.  N.  ton,   34   Tex.   309.      (See,   however, 

S.  126;  In  re  Tilleard,  3  DeG.  J.  &  Weatherford,    etc.,    R.    R.    Co.    v. 

S.  519.  Granger,  86  Tex.  350,  358,  24  S.  W. 

46.  In  re  Tilleard,  3  DeG.  J.  &  S.  795,    40   Am.    St.    Rep.    837).      See 
519,  but  see  In  re  Skegness  &   St.  Teeple  v.   Hawkeye  Gold  Dredging 
Leonard's  Tramways  Co.,  L.  R.  41  Co.,  137  Iowa  206,  114  N.  W.  906; 
Ch.  Div.  215.  also  Stillwell  v.  Spokane  Alarm  Co., 

47.  See    In   re    Skegness    &    St.  66  Wash.  703,  120  Pac.  85. 
Leonard's  Tramways  Co.,  L.  R.  41 


PROMOTION  EXPENSES. 


167 


his  fellow  promoters,49  and  should,  therefore,  be  allowed  to  recover 
compensation  for  such  services  directly  from  the  corporation.50 

One  who  assists  in  the  promotion  of  a  corporation  can  recover 
compensation  from  those  promoters  only,  who  employed  him  or 
in  some  way  authorized  or  sanctioned  his  employment.51  The 
question  as  to  whether  a  particular  promoter  has  been  sufficiently 


49.  See  post,  §§  306,  317. 

50.  Muirkirk,  etc.,  Rys.,  10  Scots 
Law  Times  247,  249,  affirmed,   (*«& 
nom.   Muir   v.    Forman's   Trustees) 
Sess.  Gas.  5  Fraser  546;  Edinburgh 
Northern   Tramways   Co.    v.   Maun, 
Sess.  Cas.,  23  Rettie  1056. 

51.  McEwan      v.      Campbell,      2 
Macq.  499;  Giles  v.  Smith,  11  Jur. 
334;  Nevins  v.  Henderson,  5  Ry.  & 
Can.  Cas.  684;  Batard  v.  Hawes,  2 
El.  &  Bl.  287;  Forrester  v.  Bell,  10 
Ir.  L.  R.  555,  and  see  Bremner  v. 
Chamberlayne,  2  Car.  &  K.  560,  and 
ante,  §  77,  and  also  post,  §  316. 

In  Jones  v.  Gould,  (200  N.  Y.  18, 
92  N.  E.  1071,  reversing,  133  App. 
Div.  889,  118  Supp.  1116,  which  fol- 
lowed 123  App.  Div.  236,  108  Supp. 
31.  See  same  case  on  later  appeal, 
209  N.  Y.  419, 103  N.  E.  720,  affirming, 
152  App.  Div.  881,  136  Supp.  600), 
the  plaintiff  alleged  that  he  had,  at 
the  request  of  the  defendants,  acting 
as  syndicate  managers,  advanced 
moneys  for  the  examinaton  of  cer- 
tain properties  and  for  the  pur- 
chase thereof,  and  caused  a  corpora- 
tion to  be  organized  to  which  title 
to  said  properties  was  conveyed,  and 
that  he  was  ready  and  willing  to 
convey  to  the  defendants  all  the 
capital  stock  of  the  corporation  or 
title  to  the  properties,  upon  the  pay- 
ment of  his  expenses  and  reasonable 


compensation  for  his  services,  but 
that  the  defendants  had  failed  and 
refused  to  make  such  payment.  The 
Appellate  Division  held  that  the 
syndicate  managers  acted  as  agents 
for  their  syndicate,  a  disclosed  prin- 
cipal, and  were  therefore  not  per- 
sonally liable  to  the  plaintff  for  the 
contracts  made  by  them  as  such 
agents.  The  Court  of  Appeals,  how- 
ever, held  that  as  the  syndicate 
agreement  provided  that  each  sub- 
scriber should  be  liable  only  to  the 
syndicate  managers  and  then  only 
to  the  amount  of  his  subscription,  it 
was  the  intention  that  the  sub- 
scribers should  incur  no  liability  to 
third  parties,  and  if  that  intention 
was  effectual  in  law,  then  the  syn- 
dicate managers  were  not  authorized 
to  pledge  the  credit  of  the  sub- 
scribers ;  that  if  it  should  be  as- 
sumed that  under  the  law,  the 
subscribers  to  the  syndicate  agree- 
ment became  partners  as  to  third 
parties  despite  their  agreement  not 
to  become  such  as  among  them- 
selves, then  the  syndicate  managers, 
being  themselves  members  of  the 
syndicate,  were  principals  equally 
with  the  other  subscribers  and 
jointly  liable  with  them,  and  that 
the  objection  as  to  the  non-joinder 
of  the  other  syndicate  members,  not 
having  been  taken  by  demurrer  or 
answer,  was  waived. 


168  THE  LAW  OF  PROMOTERS. 

connected  with  the  employment  is  one  of  fact  52  and  an  authoriz- 
ation or  sanction  will  be  readily  inferred.53 

An  actual  employment,  express  or  implied,  and  the  rendition  of 
services,  must  be  shown.  A  claim  for  compensation  cannot  be 
founded  upon  the  fact  that  suggestions  made  by  the  plaintiff 
were  accepted  and  acted  upon  by  the  promoters.54 

One  who  has  rendered  services  under  an  express  contract  must 
prove  that  he  performed  the  contract  according  to  its  terms,55  or 
that  such  performance  was  prevented  by  his  employer.5®  If  the  ex- 
press contract  is,  because  of  its  terms,  unenforceable,  compen- 
sation may,  perhaps,  be  recovered  upon  a  quantum,  meruit.57 

The  promoter  may  save  himself  from  personal  liability  by  ex- 
acting from  those  assisting  him  in  the  promotion,  a  stipulation 
that  they  will  not  hold  him  personally  responsible  for  their  com- 
pensation, or  that  they  shall  be  paid  only  when  the  corporation 
has  paid  the  promoter.58  If  the  employees  of  the  promoter  agree 
that  they  shall  receive  their  compensation  only  when  the  promoter 
has  been  paid  by  the  corporation,  they  cannot  recover  from  the 
promoter  if  he  is  for  any  reason  unable  to  obtain  satisfaction 
from  it.59  The  intention  that  the  promoter  shall  not  be  per- 

52.  Riley  v.  Packington,  L.  R.  2  of    the    corporation    made    between 
C.  P.  536,  and  see  ante,  §  77,  and  himself   and   another  promoter   but 
post,  §  316n.  not    adopted    by    the    corporation. 

53.  Sproat  v.  Porter,  9  Mass.  300,  Hearther  v.  Southern  Power  &  Mill- 
and  see  ante,  §  77,  and  post,  §  316n.  ing  Co.,  16  Pa.  Dist.  Ct.  198. 

54.  Flaherty  v.  Murray,  60  N.  Y.          56.  Eastman    v.    Blackledge,    171 
App.  Div.  92,  69  Supp.  675,  appeal  111.   App.  404.     Compare  Gorgier  v. 
dismissed,  172  N.  Y.  646,  65  N.  E.  Morris,  7  C.  B.  N.  S.  588. 

1116.  See  also  post,  §  309. 

55.  Connell     v.     McWatters,     54          57.  Sullivan  v.  Detroit,  etc.,  Ry., 
Pitts.  Legal  Journal  (O.  S.)  69,  and  135  Mich.  661,  98  N.  W.  756,    64  L. 
see  post,  §  309.  R.  A.  673,  106  Am.  St.  R.  403. 

It   has   been   held   that  it   is   no  58.  Parsons   v.    Spodner,   5   Hare 

answer   to   a   promoter's   claim   for  102 ;  Giles  v.  Smith,  11  Jur.  334,  and 

reimbursement  for  moneys  expended  see  ante,  §  77,  and  see  post,  §  316. 

by  him,  that  he  has  failed  to  per-  59.  See    Wheeler    v.    Fradd,    14 
form  an  agreement  for  the  financing 


PROMOTION  EXPENSES.  169 

sonally  liable  to  those  employed  by  him  must,  however,  be  clearly 
expressed,  for  the  courts  are  inclined,  in  case  of  doubt,  to  fasten 
the  responsibility  upon  the  promoter.60  If  one  employed  by  the 
promoter  to  perform  services  preliminary  to  the  organization  of 
the  company  agrees  to  hold  the  promoter  free  from  personal 
liability,  there  is,  in  case  his  claim  for  services  be,  after  the  suc- 
cessful organization  of  the  corporation,  rejected,  some  difficulty 
in  granting  him  relief.  If  the  services  rendered  were  of  such  char- 
acter that  the  benefit  thereof  was  received  by  the  corporation  at 
the  moment  that  it  achieved  legal  existence,  it  cannot  be  said  that 
the  corporation  by  accepting  such  benefits  impliedly  agreed  to 
pay  therefor.61  The  obvious  injustice  of  not  granting  any  com- 
pensation for  services  duly  rendered  and  fully  enjoyed  should, 
whenever  possible,  be  avoided  by  interpreting  the  agreement  as 
intending  merely  that  the  promoter  shall  not  be  made  to  pay  for 
the  services  rendered  if  he  fails  to  organize  and  float  the  corpora- 
tion.62 Such  interpretation,  while  preventing  what  amounts  to  a 
fraud  on  his  part,  works  no  hardship  upon  the  promoter,  as  he- 
can  recover  from  the  corporation,  as  one  of  his  disbursements 
upon  the  promotion,  the  moneys  which  he  is  made  to  pay  to  his  as- 
sistants.63 

Times  Law  Rep.  302,  and  see  ante,  Ohio  Dec.  Reprint  1068,  10  Am.  L. 

§  77n.  Rec.  181.      , 

60.  See  Scott  v.  Lord  Ebury,  L.  62.  The  question  as  to  the  under- 
R.  2  C.  P.  255,  36  L.  J.  C.  P.  161.  standing  of  the  parties  may  in  some 
See  ante,  §  77.  cases  be  left  to  the  jury.    See  Hig- 

61.  See    discussion   under    §§    84  gins  v.  Hopkins,  3  Exch.  163. 
and  87,  ante.     See  also  ante,  §  58.  See  post,  §  316. 

But  see  City  Bldg.  Assn.  v.  Zahner,  6         63.  See  ante,  §  82. 


CHAPTER  VI. 

OF  SECRET  PROFITS. 

Sec**on  89.  Introductory. 

90.  Basis  of  rule  against  secret  profits. 

91.  Manner  of  taking  profit  immaterial. 

92.  Taking  shares  as  compensation. 

93.  Taking   commission   or   other   compensation  ,on   sale   to   cor- 
poration. 

94.  Accepting   gift  of   money,   qualifying  shares,   or  other   thing 
of  value. 

95.  Profit  made  by  purchase  and  resale  to  corporation. 

96.  Secret  collateral  agreements. 

97.  Profits  made  in  sustaining  the  market. 

98.  Other  collateral  profits. 

99.  Profits  of  business  carried  on  with  existing  concern  pending 
incorporation. 

100.  Absence  of  dishonest  intent,  or  of  injury  to  the  corporation, 
immaterial. 

101.  Distinction  between  "  secret  profits,"  and  sale  of  promoter's 
property  to  corporation. 

102.  Restrictions  upon  sale  of  promoter's  property  to  corporation. 

103.  Necessity  of  determining  whether  promoter  acquired  property 
before,  or  after,  he  entered  upon  relation. 

104.  What  is  deemed  acquisition  of  property. 

105.  Property  acquired  by  gift. 

106.  Promoter's  rights  under  contract  afterward  modified. 

107.  Expired  options. 

108.  Promoter    who    acquired    property    before   commencement   of 
relation,   sometimes   treated   as  though   he   had   acquired   it 
thereafter. 

§  89.  Introductory. 

Promoters  are,  according  to  the  weight  of  modern  authority, 

to  reasonable  compensation  for  their  services  upon  the 
(170) 


SECRET  PROFITS. 


171 


promotion,  and  there  is  no  objection  to  the  taking  of  promoters' 
profits  in  whatever  amount,  provided  that  the  facts  in  regard  to 
such  profits  are  fully  disclosed.1  The  promoters'  profits  become 
unlawful  only  when  they,  either  through  oversight,  or  because  of 
a  fear  that  knowledge  thereof  might  prevent  the  successful  con- 
summation of  their  plans,  or  for  any  other  reason,  fail  to  disclose 
the  profits  which  they  are  deriving  from  the  promotion.2 

§  90.  Basis  of  the  rule  against  secret  profits. 

While  a  promoter  is  neither  a  trustee  nor  an  agent  of  the  cor- 
poration which  he  promotes,  and  has,  in  theory  of  law,  no  power 
to  act  for  nor  in  any  way  to  represent  it,  he  does  in  fact  mold  the 
corporation  and  control  it  while  in  process  of  formation.  He 
stands,  because  of  this  control,  in  a  fiduciary  relation  to  the  cor- 


1.  Yale  Gas  Stove  Co.  v.  Wilcox, 
64   Conn.   101,   122,  29  Atl.  303,  25 
L.  R.   A.  90,  42  Am.   St.  Rep.  159, 
47  Am.  &  Eng.  Corp.  Cas.  G47 ;  Bige- 
low  v.   Old   Dominion   Copper,   etc., 
Co.,   74  N.   J.   Eq.  457,  501,   71  Atl. 
153 ;  Arnold  v.  Searing,  78  N.  J.  Eq. 
146,  158,  78  Atl.  762,  767 ;  Spaulding 
v.  North  Milwaukee  Town  Site  Co., 
106  Wis.  481,  489^92,  81  N.  W.  1064, 
1066-1068 ;  Edwards  v.  Johnston,  — 
Wyo.    — ,    152    Pac.    273;    Whaley 
Bridge  Calico  Printing  Co.  v.  Green, 
L.  R.  5  Q.  B.  D.  109,  112,  28  W.  R. 
351. 

2.  Federal. — Walker     v.     Pike 
County  Land  Co.,  139  Fed.  Rep.  609, 
611,  71  C.  C.  A.  593 ;  Yeiser  v.  U.  S. 
Board  &  Paper  Co.,  107  Fed.  Rep. 
340,  46  C.  C.  A.  567,  52  L.  R.  A.  724. 

Arkansas. — Tegarden  Bros.  v. 
Big  Star  Zinc  Co.,  71  Ark.  277,  281, 
72  S.  W.  989,  991. 

California. — Lomita  Land  & 
Water  Co.  v.  Robinson,  154  CaL  36, 


45,  97  Pac.  10,  18  L.  R.  A.  N.  S. 
1106,  1122,  and  eases  cited. 

Connecticut. — Yale  Gas  Stove  Co. 
v.  Wilcox,  64  Conn.  101,  121-122, 
29  Atl.  303,  25  L.  R.  A.  90,  42  Am. 
St.  Rep.  159,  47  Am.  &  Eng.  Corp. 
Cas.  647. 

Massachusetts. — Hayward  v.  Lee- 
son,  176  Mass.  310,  318,  57  N.  E. 
656,  49  L.  R.  A.  725,  and  cases  cited. 

Missouri. — Exter  v.  Sawyer,  146 
Mo.  302,  47.  S.  W.  951. 

New  Jersey. — Bigelow  v.  Old  Do- 
minion Copper,  etc.,  Co.,  74  N.  J. 
Eq.  457,  501,  71  Atl.  153;  Plaque- 
mines  Tropical  Fruit  Co.  v.  Buck, 
52  N.  J.  Eq.  219,  230,  27  Atl.  1094, 
44  Am.  &  Eng.  Corp.  Cas.  686; 
Groel  v.  United  Electric  Co.  of  N. 
J.,  70  N.  J.  Eq.  616,  622,  61  Atl. 
1061 ;  Loudenslager  v.  Woodbury 
Heights  Land  Co.,  58  N.  J.  Eq.  556, 
559-60,  43  Atl.  671 ;  Arnold  v.  Sear- 
ing, 78  N.  J.  Eq.  146,  78  Atl.  762. 

New   York. — Dorris   v.   French,  4 


172 


THE  LAW  OF  PROMOTERS. 


poration,  and  will  not,  without  a  full  disclosure,  be  permitted  to 
derive  any  personal  profit  from  the  promotion.8 

The  Supreme  Court  of  Arkansas  in  a  recent  case  said,4  "  While 
the  promoters  of  a  corporation  are  not  its  agents,  they  assume  a 
relation  of  trust  and  confidence  towards  those  whom  they  invite 
to  join  them  in  the  contemplated  enterprise  by  becoming  members 
of  the  corporation.  Such  relation  '  requires  the  same  good  faith 
on  their  part  which  the  law  exacts  of  directors  of  corporations 


Hun  292,  296;  Colton  Improvement 
Co.  v.  Richter,  26  Misc.  26,  30,  55 
Supp.  486. 

Pennsylvania. — Densmore  Oil  Co. 
v.  Densmore,  64  Pa.  43,  49-50. 

Wisconsin. — First  Avenue  Land 
Co.  v.  Hildebrand,  103  Wis.  530,  79 
N.  W.  753;  Pietsch  v.  Milbrath,  123 
Wis.  647,  101  N.  W.  388,  102  N.  W. 
342,  68  L.  R.  A.  945,  107  Am.  St. 
Rep.  1017. 

United  Kingdom  and  Colonies. — 
In  re  Olympia,  Ltd.,  1898,  2  Ch.  Div. 
153,  166,  (affirmed,  sub  nom.  Gluck- 
stein  v.  Barnes,  1900  App.  Gas.  240)  ; 
Re  Sale  Hotel  &  Botanical  Gardens, 
78  Law  Times  N.  S.  368. 

3.  Federal. — Dickerman  v.  North- 
ern Trust  Co.,  176  U.  S.  181,  204,  20 
Sup.  Ct.  311,  44  L.  Ed.  423;  Yeiser 
v.  U.  S.  Board  &  Paper  Co.,  107 
Fed.  Rep.  340,  344,  46  C.  C.  A.  567, 
52  L.  R.  A.  724,  727. 

Alabama. — Moore  v.  Warrior  Coal 
&  Land  Co.,  178  Ala.  234,  59  So.  219, 
Am.  &  Eng.  Ann.  Gas.,  1915  B.  173. 

Arizona. — Hughes  v.  Cadena  De- 
Cobre  Min.  Co.,  13  Ariz.  52,  61,  108 
Pac.  231,  234. 

Indiana. — Parker  v.  Boyle,  178 
Ind.  560,  99  N.  E.  986. 

Iowa. — Hinkley  v.  Sac  Oil  & 
Pipe  Line  Co.,  132  Iowa  396,  402- 


403,  107  N.  W.  629,  632,  119  Am. 
St.  R.  564. 

Missouri— Brooker  v.  William  H. 
Thompson  Trust  Co.,  254  Mo.  125, 
156,  162  S.  W.  187,  194-195. 

New  Jersey. — Arnold  v.  Searing, 
78  N.  J.  Eq.  146,  157-158,  78  Atl. 
762,  766-767;  Loudenslager  v. 
Woodbury  Heights  Land  Co.,  58  N. 
J.  Eq.  556,  559-560,  43  Atl.  671; 
See  v.  Heppenheimer,  69  N.  J.  Eq. 
36,  72,  61  Atl.  843. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  76,  96  Pac.  528,  531. 

Virginia. — Jordan  v.  Annex  Cor- 
poration, 109  Va.  625,  64  S.  E.  1050, 
17  Am.  &  Eng.  Ann.  Gas.  267. 

United  Kingdom  and  Colonies. — 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Gas.  1218, 
1229-1230,  6  Eng.  Rul.  Gas.  777, 
39  L.  T.  N.  S.  269,  27  W.  R.  65; 
Bagnall  v.  Carlton,  L.  R.  6  Ch.  Div. 
371,  406,  408;  Emma  Silver  Mining 
Co.  v.  Grant,  L.  R.  11  Ch.  Div.  918, 
936-937;  Hay's  Case,  L.  R.  10  Ch. 
App.  593,  601;  Lydney  &  Wigpool 
Iron  Ore  Co.  v.  Bird,  L.  R.  33  Ch. 
Div.  85,  94,  24  Am.  &  Eng.  Corp. 
Gas.  23. 

4.  Tegarden  Bros.  v.  Big  Star 
Zinc  Co.,  71  Ark.  277,  281,  72  S. 
W.  989,  991. 


SECRET  PROFITS. 

and  all  other  fiduciaries.'  Like  directors  and  other  officers  of  cor- 
porations, they  can  make  no  profit  out  of  such  relation  except 
openly  and  with  the  consent  of  those  to  whom  they  are  so  related. 
If  they  take  advantage  of  their  position,  and  make  a  secret  profit 
out  of  their  purchases  for  the  corporation  or  corporators,  the 
profit  is  the  property  of  the  proposed  corporation  when  organized, 
and  they  may  be  compelled  to  account  for  it  in  any  proper  pro- 
ceeding." 

It  has  been  said  that  "  the  doctrine  of  promoter's  liability  is 
not  the  creature  of  statute;  it  is  'judge-made'  law,  in  the  sense 
that  courts  of  equity  everywhere,  recognizing  the  obligations 
arising  from  the  fiduciary  relation,  have  applied  to  it  the  same 
principles  of  equity  that  obtain  in  all  cases  of  trust."  5 

Some  authorities  base  the  rule  against  promoters'  secret  profits 
upon  the  similarity  of  the  relation  between  the  promoters  and 
those  whom  they  bring  into  the  transaction,  to  a  partnership  re- 
lation.6 It  should,  however,  be  noted  that  the  principle  of  the 
law  of  partnership  here  referred  to,  is  itself  founded  upon  the 
doctrines  of  the  law  of  agency.7 

It  has  been  said  that  those  who  buy  shares  from  the  treasury  of 
the  corporation  have  the  right  to  assume,  in  the  absence  of  knowl- 
edge to  the  contrary,  that  all  other  subscribers  are  paying  the 
same  price  for  their  shares.8  It  is,  however,  inadvisable  to  make 

5.  Chancellor    Pitney    (now    As-  8.  Yeiser  v.  U.  S.  Board  &  Paper 
sociate  Justice  of  the  United  States  Co.,  107  Fed.  Rep.  340,  344,  46  C.  C. 
Supreme  Court)   in  Bigelow  v.  Old  A.  567,  52  L.  R.  A.  724;  Hinkley  v. 
Dominion  Copper  Co.,  74  N.  J.  Eq.  Sac  Oil  &  Pipe  Line  Co.,  132  Iowa 
457,  506,  71  Atl.  153.  396,   403,   107  N.    W.   629,   632,   119 

6.  Yale  Gas  Stove  Co.  v.  Wilcox,  Am.  St.  R.  564,   (citing  Helliwell  on 
64  Conn.  101,  121,  29   Atl.   303,  25  Stock  &  Stockholders,  §  146)  ;  Shaw- 
L.  R.  A.  90,  42  Am.   St.  Rep.  159,  nee  Comm.  &  Sav.  Bk.  Co.  v.  Miller, 
47    Am.    &    Eng.    Corp.    Cas.    647;  24   Ohio   C.   C.    198,   211;    Wills   v. 
Wills  v.  Nehalem  Coal  Co.,  52  Or.  Nehalem  Coal  Co.,  52  Or.  70,  85,  96 
70,  81,  96  Pac.  528,  532;  Densmore  Pac.  528,  534.     See  also  cases  cited 
Oil  Co.  v.  Densmore,  64  Pa.  43,  50.  under  note  10. 

7.  Bentley  v.  Craven,  18  Beav.  75.  A  subscriber  is,  of  course,  entitled 


174  THE  LAW  OF  PROMOTERS. 

this  statement  the  basis  of  the  rule  against  promoters'  secret 
profits.  The  rule  against  secret  profits  is  settled  beyond  question, 
but  the  right  of  each  subscriber  to  assume  that  all  are  going  in 
on  the  same  basis  is  not  conclusively  established.  To  say  that 
the  promoters  can  in  no  event  secure  to  themselves  any  secret  ad- 
vantage is  a  very  different  thing  from  saying  that  they  cannot 
offer  a  special  inducement  to  some  subscriber  whose  co-operation 
is  deemed  of  particular  importance.  Some  authorities  indicate 
that  such  special  inducements  are  entirely  proper.9  Other  cases 
support  a  rule  that  all  are  presumed  to  come  in  on  the  same  basis, 
and  that  no  secret  profit,  or  advantage  over  the  others,  may  be 
given  to  any  subscriber.10 

It  may,  of  course,  be  a  material  consideration  that  the  special 
inducement  is  given  at  the  personal  expense  of  the  promoters,  and 
not  at  the  expense  of  the  corporation. 

§  91.  Manner  of  taking  profit  immaterial. 

A  promoter's  secret  profit  is  unlawful  because  of  the  fiduciary 
relation  in  which  he  stands  to  the  corporation.  It  is  the  fact  of 

to    assume    that    all    shareholders  Robinson,   154  Cal.  36,  50,  97  Pac. 

stand  on  the  same  basis  as  to  their  10,  18  L.  R.   A.   N.   S.   1106,  1130; 

future    relations    to    the    company.  Koster  v.  Pain,  41  N.  Y.  App.  Div. 

In  re  Anglo  Greek  Steam  Co.,  L.  R.  443,  58  N.   Y.   Supp.  865 ;   Clark  & 

2  Eq.  1,  9-10,  35  Beav.  399,  410-411.  Marshall  on  Private  Corporations,  § 

9.  Willock   v.   Dilworth,   204   Pa.  467c.     See  cases  cited  under  note  8. 
St.    492,    54   Atl.    278;    Cranney   v.  See  also  ante,  §  9. 

McAllister,  35  Utah  550,  101  Pac.  The  matter  is  in  England  par- 
985;  Milwaukee  Cold  Storage  Co.  v.  tially  controlled  by  statute:  Corn- 
Dexter,  99  Wis.  214,  74  N.  W.  976,  panies  (Consolidation)  Act  of  1908. 
40  L.  R.  A.  837;  Thames  Navigation  (Stat.  8  Edw.  VII),  §  89. 
Co.  v.  Reid,  9  Ont.  754,  reversed  on  One  joining  with  others  in  the 
another  ground,  13  Ont.  App.  303.  signing  of  a  subscription  agreement, 
See  Morgan  v.  Struthers,  131  TJ.  cannot  vary  his  obligations  by  prov- 
S.  246,  33  L.  Ed.  132,  9  Sup.  Ct.  726,  ing  some  collateral  understanding, 
and  Meyer  v.  Blair,  109  N.  Y.  600,  but  this  is  a  different  matter.  See 
17  N.  E.  228,  4  Am.  St.  R.  500.  ante,  §  70,  and  post,  §§  219,  263. 

10.  Lomita  Land  &  Water  Co.  v. 


SECRET  PROFITS. 


175 


obtaining  the  secret  profit,  not  the  manner  in  which  it  is  obtained, 
that  constitutes  the  wrong.  No  evasion,  however  ingenious  or  skill- 
ful, can  make  the  secret  profit  lawful.11  Many  devices,  some  of 
them  palpable,  others  ingenious,  have  been  resorted  to  from  time 
to  time.  All  of  them  have,  upon  discovery,  been  condemned.12 

§92.  Taking  shares  as  compensation. 

The  issue  by  the  promoters  to  themselves,  without  the  consent 
of  the  stockholders  or  directors,  of  a  substantial  part  of  the  share 


11.  Yale  Gas   Stove  Co.   v.   Wil- 
cox,  64  Conn.  101,  121-122,  29  Atl. 
303,  25  L.  R.  A.  90,  42  Am.  St.  Rep. 
159,  47  Am.  &  Eng.  Corp.  Gas.  647. 

Hinkley  v.  Sac  Oil  &  Pipe  Line 
Co.,  132  Iowa  396,  403,  107  N.  W. 
629,  632,  119  Am.  St.  R.  564. 

Midwood  Park  Co.  v.  Baker,  128 
N.  Y.  Supp.  954,  aff'd,  144  N.  Y. 
App.  Div.  939,  129  N.  Y.  Supp.  1135, 
affirmed,  207  N.  Y.  675,  100  N.  E. 
1130. 

In  re  Olympia,  Ltd.,  1898,  2  Ch. 
Div.  153,  166,  171,  affirmed,  ««&  now. 
Gluckstein  v.  Barnes,  1900,  App. 
Cas.  240;  Archer's  Case,  1892,  1  Ch. 
Div.  322,  336;  Hay's  Case,  L.  R.  10 
Ch.  App.  593. 

Note  to  Yale  Gas  Stove  Co.  v. 
Wilcox,  25  L.  R.  A.  92,  and  note  to 
Lomita  Land  &  Water  Co.  v.  Robin- 
son, 18  L.  R.  A.  N.  S.  1110. 

12.  A    trifling    profit    might    per- 
haps be  overlooked  upon  the  prin- 
ciple   de    minimis    non    cur  at    lex. 
Emma  Silver  Mining  Co.  v.  Grant, 
L.   R.   11   Ch.    Div.   918,   934.      See 
Bagnall  v.  Carlton,  L.  R.  6  Ch.  Div. 
371,    408,    to    the    effect    that    the 
amount  of  the  profit  does  not  effect 
the  promoter's  liability. 


If  the  secret  profit  of  the  promoter 
does  not  exceed  reasonable  com- 
pensation for  his  services,  the  courts 
might  in  some  jurisdictions  grant 
him  an  allowance  for  services  which 
would  completely  offset  the  claim 
of  the  corporation.  See  ante,  §  85. 

It  is  true  that  the  rule  against 
secret  profits  may  be,  in  effect, 
evaded  by  the  promoters  taking  the 
entire  issue  of  the  capital  stock  of 
the  company  in  payment  for  their 
property,  regardless  of  its  cost,  and 
then  reselling  the  shares  to  the  pub- 
lic. This  practical  exception  to  the 
rule  against  secret  profits,  rests 
upon  the  theory  that  all  the  sub- 
scribers are  parties  to  the  transac- 
tion, and  that  there  is  in  contempla- 
tion of  law  no  secret  profit.  See 
post,  §§  120,  130. 

The  court  in  Rogers  v.  Great 
Southern  Accident  &  Fidelity  Co., 
137  Ga.  555,  73  S.  E.  848,  sustained, 
without  opinion,  a  demurrer  to  a 
complaint  demanding  an  account- 
ing for  moneys  unlawfully  taken 
by  the  promoters.  The  petition  was 
inartificially  drawn,  but  it  is  unfor- 
tunate that  the  court  did  not  set 
forth  its  precise  reasons  for  dis- 


176 


THE  LAW  OF  PROMOTERS. 


capital  of  the  corporation  as  compensation  for  promoters'  serv- 
ices, is  obviously  improper.13 

§  93.  Taking  commission  or  other  compensation  on  sale  to  the 

corporation. 

The  acceptance  by  promoters  of  commissions  from  persons 
selling  property  to  the  corporation  has  frequently  been  con- 
demned.14 An  agreement  by  such  vendors  to  pay  the  promoters 


missing  a  petition  which  unques- 
tionably proceeded  upon  a  gross 
fraud. 

13.  Hughes    v.    Cadena    DeCobre 
Min.  Co.,  13  Ariz.  52,  108  Pac.  231; 
Hayward  v.  Leeson,  176  Mass.  310, 
57  N.  E.  656,  49  L.  R.  A.  725;  Mc- 
Allister v.  American  Hospital  Ass'n, 
62  Or.  530,  125  Pac.  286. 

As  to  whether  shares  may  ever 
be  lawfully  issued  in  payment  for 
promoters'  services,  see  ante,  §  87n. 

The  taking  of  shares  without  con- 
sideration is  obviously  unlawful, 
Simon  v.  Weaver,  143  Wis.  330,  127 
N.  W.  950,  and  cases  supra. 

14.  California. — Lomita    Land    & 
Water  Co.  v.  Robinson,  154  Cal.  36, 
60,  et  seg.,  97  Pac.  10,  18  L.  R.  A.  N. 
S.  1106,  1130,  et  seq. 

Massachusetts. — Emery  v.  Par- 
rott,  107  Mass.  95. 

Mississippi. — Cook  v.  Southern 
Columbian  Climber  Co.,  75  Miss. 
121,  21  So.  795. 

New  Jersey. — Plaquemines  Tropi- 
cal Fruit  Co.  v.  Buck,  52  N.  J.  Eq. 
219,  231-232,  27  Atl.  1094,  44  Am.  & 
Eng.  Corp.  Gas.  686. 

Wisconsin. — Limited  Inv.  Assn.  v. 
Glendale  Inv.  Assn.  99  Wis.  54,  74 
N.  W.  633. 


United  Kingdom  and  Colonies. — 
Bagnall  v.  Carlton,  L.  R.  6  Ch. 
Div.  371 ;  Emma  Silver  Mining  Co.  v. 
Grant,  L.  R.  11  Ch.  Div.  918; 
Lydney  &  Wigpool  Iron  Ore  Co.  v. 
Bird,  L.  R.  33  Ch.  Div.  85,  24  Am.  & 
Eng.  Corp.  Cas.  23,  reversing,  L.  R. 
31  Ch.  Div.  328,  12  Am.  &  Eng.  Corp. 
Cas.  6 ;  Beck  v.  Kantorowicz,  3  K.  & 
J.  230;  McKay's  Case,  L.  R.  2  Ch. 
Div.  1;  In  re  Hereford  &  South 
Wales  Waggon  &  Engineering  Co., 
L.  R.  2  Ch.  Div.  621,  35  L.  T.  N.  S. 
40;  Atwool  v.  Merry  weather,  L.  R. 
5  Eq.  464n,  37  L.  J.  Ch.  N.  S.  35. 

And  see  note  to  Yale  Gas  Stove 
Co.  v.  Wilcox,  25  L.  R.  A.  92,  also 
note  to  Lomita  Land  &  Water  Co. 
v.  Robinson,  18  L.  R.  A.  N.  S.  1115. 

Compare  Richard  Hanlon  Milli- 
nery Co.  v.  Mississippi  Valley  Trust 
Co.,  251  Mo.  553,  591,  158  S.  W.  359, 
368,  where  the  court  refused,  on  the 
ground  that  the  moneys  received 
by  the  promoter  had  never  been  in 
the  possession  of  the  corporation,  to 
compel  him  to  account  therefor. 

Compare  also  Richardson  v. 
Graham,  45  W.  Va.  134,  30  S.  E.  92, 
where  it  was  held  that  the  payment 
by  the  vendor  to  the  promoters  of 
compensation  for  their  services  in 


SECRET  PROFITS. 


177 


whatever  sum  above  a  certain  fixed  price  may  be  received  for  the 
property  from  the  corporation  is  likewise  unlawful.15  Any  ar- 
rangement by  which  the  promoters  secretly  receive  a  part  of  the 
purchase  price  paid  by  the  corporation  is  objectionable.16 

The  fact  that  the  promoter  had,  before  he  conceived  the  idea 
of  organizing  the  corporation,  been  employed  as  agent  to  sell  the 


obtaining  subscriptions  was  not  im- 
proper. 

It  has  been  held  that  a  commission 
paid  by  a  vendor  to  a  promoter  can- 
not be  recovered  by  the  corporation 
if  it  was  agreed  between  the  cor- 
poration and  the  vendor  that  the 
latter  should  pay  all  promotion  ex- 
penses. Re  Sale  Hotel  &  Botanical 
Gardens,  Ltd.,  78  L.  T.  N.  S.  368, 
reversing,  77  L.  T.  N.  S.  681;  and 
see  Arkwright  v.  Newbold,  L.  R.  17 
Ch.  Div.  301.  (Cf.  Re  Eskern  Slate, 
etc.,  Co.,  Ltd.,  37  L.  T.  N.  S.  222). 
The  correctness  of  these  decisions 
may  well  be  doubted.  It  seems  on 
principle  that  the  corporation  is  en- 
titled to  know  the  promoter's  inter- 
est in  the  transaction. 

The  language  of  the  court  in 
Central  Land  Co.  v.  Obenchain,  92 
Va.  130,  142,  22  S.  E.  876,  880,  seems 
to  intend  that  the  promoter's  com- 
mission would  be  lawful  if  the  agree- 
ment for  the  payment  thereof  were 
entered  into  before  the  promoter  en- 
tered upon  his  fiduciary  relation  to 
the  corporation.  This,  if  intended, 
is  unsound  in  principle  and  contrary 
to  the  weight  of  authority.  See 
cases  cited  infra,  note  17. 

It  has  been  held  that  if  the  sub- 
scribers are  informed  that  the  pro- 
moter is  to  be  paid  a  commission, 


the  fact  that  the  amount  of  the  com- 
mission is  not  disclosed  does  not 
make  the  promoter  liable  for  a 
secret  profit.  Advance  Realty  Co. 
v.  Nichols,  126  Minn.  267,  148  N. 
W.  65,  compare  post,  §§  114,  115. 

15.  Tegarden   Bros.    v.    Big    Star 
Zinc  Co.,  71  Ark.  277,  72  S.  W.  989 ; 
First    Avenue   Land    Co.    v.    Hilde- 
brand,  103  Wis.  530,  79  N.  W.  753. 

16.  Federal. — Chandler  v.  Bacon, 
30  Fed.  Rep.  538. 

Connecticut. — Yale  Gas  Stove  Co. 
v.  Wilcox,  64  Conn.  101,  29  Atl.  303, 
25  L.  R.  A.  90,  42  Am.  St.  Rep.  159, 
47  Am.  &  Eng.  Corp.  Gas.  647. 

Massachusetts. — Emery  v.  Par- 
rott,  107  Mass.  95. 

Missouri.— St.  Louis  &  Utah  S.  M. 
Co.  v.  Jackson,  5  Central  L.  J.  317. 

New  York. — See  Koster  v.  Pain, 
41  App.  Div.  443,  58  Supp.  865; 
Campbell  v.  Cypress  Hills  Cemetery, 
41  -N.  Y.  34. 

Oregon. — Johnson  v.  Sheridan 
Lumber  Co.,  51  Or.  35,  40,  93  Pac. 
470,  472. 

United  Kingdom  and  Colonies. — 
Hichens  v.  Congreve,  4  Russ.  562, 
574;  Eland's  Case,  1893,  2  Ch.  Div. 
612 ;  Scottish  Pacific  Coast  Min.  Co., 
Ltd.,  v.  Falkner,  Bell  &  Co.,  Sess. 
Gas.,  15  Rettie  290. 

See  also  cases  cited  in  preceding 
notes. 


178 


THE  LAW  OF  PROMOTERS. 


property  in  question,  does  not  legalize  the  payment  of  a  commis- 
sion upon  the  sale  to  the  corporation,  nor  relieve  him  from  ac- 
countability therefor.17 

§  94.  Accepting    gift    of    money,    qualifying    shares,   or    other 

thing  of  value. 

Promoters  have  frequently  been  compelled  to  account  to  the 
•corporation  for  moneys  or  shares  gratuitously  given  them  by  one 
.selling  property  to  the  corporation  or  otherwise  interested  in  the 
organization  thereof,18  for  shares  given  them  as  their  qualification 
for  the  office  of  director,19  for  qualifying  shares  sold  to  them  for 


17.  Roster  v.  Pain,  41  N.  Y.  App. 
Div.  443,  58   Supp.   865;   Lydney  & 
"Wigpool  Iron  Ore.  Co.  v.  Bird,  L.  R. 
33  Ch.  Div.  85,  94-95,  24  Am.  &  Eng. 
•Corp.  Cas.  23,  reversing,  L.  R.  31  Ch. 
Div.  328,  12  Am.  &  Eng.  Corp.  Cas. 
6;    Whaley.  Bridge  Calico   Printing 
Co.  v.  Green,  L.  R.  5  Q.  B.  Div.  109, 
112,  28  W.  R.  351;  Bagnall  v.  Carl- 
ton,  L.  R.  6  Ch.  Div.  371,  407.     Cf. 
Central  Land  Co.  v.  Obenchain,  92 
Va.  130,  142,  22  S.  E.  876,  880.     Cf. 
also   American   Shipbuilding  Co.   v. 
Commonwealth   S.   S.  Co.,  215  Fed. 
Rep.  296,  299,  131  C.  C.  A.  596. 

18.  McKay's    Case,    L.    R.    2   Ch, 
Div.  1,  5;  Hay's  Case,  L.  R.  10  Ch. 
App.    593,    602,    603,    604-605.      See 
also  In  re  Anglo  Greek  Steam  Co., 
L.  R.  2  Eq.  1,  35  Beav.  399 ;  Eden  v. 
Ridsdales  Ry.  Lamp  &  Lighting  Co., 
L.    R.   23   Q.    B.    D.   368.     Compare 
Curran  v.   Oppenheimer,   164  N.   Y. 
App.  Div.  746,  150  Supp.  369,  where 
the  broker  on  the  sale  divided  his 
•commission    with    two    of   the   pro- 
moters. 

19.  Pearson's  Case,   L.   R.  5  Ch. 
Div.  336,  aff  g,  L.  R.  4  Ch.  Div.  222 ; 


Hay's  Case,  L.  R.  10  Ch.  App.  593, 
(overruling  Orgill's  Case,  21  L.  T.  N. 
S.  221)  ;  Carling's  Case,  L.  R.  1  Ch. 
Div.  115 ;  In  re  Carriage  Co-opera- 
tive Supply  Association,  L.  R.  27  Ch. 
Div.  322 ;  De  Ruvigne's  Case,  L.  R. 
5  Ch.  Div.  306;  Ormerod's  Case,  37 
L.  T.  N.  S.  244,  25  W.  R.  765 ;  Derry 
v.  Peek,  L.  R.  14  App.  Cas.  337,  345- 
6;  In  re  Englefield  Colliery  Co.,  L. 
R.  8  Ch.  Div.  388;  In  re  Disderi  & 
Co.,  L.  R.  11  Eq.  242.  Note  to  Yale 
Gas  Stove  Co.  v.  Wilcox,  25  L.  R.  A. 
101-102. 

See  Re  Eskern  Slate  &  Slab 
Quarries  Co.,  Ltd.,  37  L.  T.  N.  S. 
222,  where  a  clause  of  the  articles 
of  association  purporting  to  legalize 
the  transaction  was  held  invalid. 
Cf.  Miller's  Case,  L.  R.  5  Ch.  Div. 
70,  aff' g,  L.  R.  3  Ch.  Div.  661. 

The  directors  were  in  Re  Carriage 
Co-operative  Supply  Association,  L. 
R.  27  Ch.  Div.  322,  held  both  jointly 
and  severally  liable  for  the  value 
of  such  shares. 

If  the  director  actually  pays  for 
his  own  shares,  but  a  sum  equal  to 
the  purchase  price  is  deposited  in 


SECRET  PROFITS. 


179 


a  nominal  consideration  20  or  at  less  than  their  fair  market 
value,21  and  for  moneys  or  other  considerations  beyond  the  es- 
tablished directors'  fees  paid  them  in  consideration  of  their  acting 
as  directors  of  the  company.22  It  was  held  in  Re  London  &  South- 
western Canal  Co.,  Ltd.,23  that  the  fact  that  the  qualifying  shares 
were  not  given  to  the  director  as  an  absolute  gift,  but  to  be  held 
by  him  as  trustee  for  the  transferor,  was  no  defense  to  the  demand 
of  the  corporation  for  the  value  thereof.  An  agreement  by  the 
vendor  of  property,  that  he  will,  whenever  requested,  repurchase 
at  cost  the  shares  sold  to  the  promoter  to  qualify  him  as  director, 
is  improper,  and  the  promoter  may  be  compelled  to  account  to  the 
corporation  for  all  benefits  received  thereunder.24 


the  director's  bank  account  by  the 
vendor  to  the  corporation,  the  di- 
rector is  liable  to  the  corpora- 
tion for  the  moneys  so  placed  to  his 
credit,  but  his  shares  cannot  be 
treated  as  unpaid,  unless  he  knew 
that  the  moneys  were  deposited  for 
the  purpose  of  reimbursing  him  for 
the  payment  made  for  his  shares. 
Eastwick's  Case,  45  L.  J.  Ch.  N.  S. 
225,  distinguishing  Hay's  Case,  L.  R. 
10  Ch.  App.  593,  44  L.  J.  Ch.  N.  S. 
721. 

20.  Mitcalfe's  Case,  L.  R.  13  Ch. 
Div.  169. 

21.  Weston's  Case,  L.   R.  10  Ch. 
Div.  579. 

22.  Bagnall  v.  Carlton,  L.  R.  6  Ch. 
Div.    371,    388-389;    Nant-Y-Glo    & 
Blaina  Iron  Works  Co.  v.  Grave,  L. 
R.  12  Ch.  Div.  738,  744,  et  seq.;  Car- 
ling's  Case,  L.  R.  1  Ch.  Div.  115; 
Ormerod's  Case,  37  L.  T.  N.  S.  244, 
25   W.   R.   765;   see  In  re  Postage 
Stamp  Automatic  Delivery  Co.,  1892, 
3  Ch.   Div.   566;   Re   Sale   Hotel  & 
Botanical  Gardens,  Ltd.,  78  L.  T.  N. 


S.  368 ;  In  re  The  Brighton  Brewery 
Co.,  37  L.  J.  Ch.  N.  S.  278,  and  Re 
Fitzroy  Bessemer  Steel  Co.,  Ltd.,  50 
L.  T.  N.  S.  144;  In  re  Drum  Slate 
Quarry  Co.,  Ltd.,  55  L.  J.  Ch.  N.  S. 
36,  53  L.  T.  N.  S.  250 ;  In  re  Howat- 
son  Patent  Furnace  Co.,  4  Times 
Law  Rep.  152 ;  In  re  Anglo  Greek 
Steam  Co.,  L.  R.  2  Eq.  1,  7-8,  35 
Beav.  399,  407,  408.  Re  London  and 
Provincial  Starch  Co.,  20  L.  T.  N.  S. 
390.  Ex  parte  Theys,  L.  R.  22  Ch. 
Div.  122. 

Cf.  dictum  in  Tyrrell  v.  Bank  of 
London,  10  H.  L.  Cas.  26,  59,  11  Eng. 
Rep.  934. 

The  directors  are  liable  to  the 
corporation  for  any  gifts  received 
from  the  promoters.  Madrid  Bank 
v.  Pelly,  L.  R.  7  Eq.  442. 

23.  1911,  1  Ch.  Div.  346,  80  L.  J. 
Ch.  N.  S.  234. 

24.  Archer's    Case,    1892,    1    Ch. 
Div.   322,   citfKl  in   Yale  Gas   Stove 
Co.  v.  Wilcox,  64  Conn.  101,  122-124, 
29  Atl.  303,  25  L.  R.  A.  90,  42  Am. 
St.  Rep.  159,  47  Am.  &  Eng.  Corp. 


180 


THE  LAW  OF  PROMOTERS. 


The  promoter  must  in  all  these  cases  account  to  the  corporation 
for  his  profits,  not  because  he  has  taken  anything  from  the  cor- 
poration, for  the  fact  that  the  corporation  has  lost  nothing  by 
the  transaction  is  immaterial,25  but  because  anything  received  by 
an  agent  beyond  his  agreed  compensation  must  be  accounted  for 
to  the  principal.26 

§  95.  Profit  made  by  purchase  and  resale  to  corporation. 

One  method  of  obtaining  secret  profits,  frequently  resorted  to 
by  promoters,  is  the  purchase  for  their  individual  account  of 


Gas.  647,  and  in  The  Telegraph  v. 
Loetscher,  127  Iowa  383,  388,  101  N. 
W.  773,  775,  4  Am.  &  Eng.  Ann.  Gas. 
667;  Reid  on  Corporate  Finance,  § 
255. 

25.  Emma    Silver    Mining   Co.    v. 
Grant,  L.  R.  11  Ch.  Div.  918,  938; 
Archer's  Case,  1892,  1  Ch.  Div.  322. 

26.  Roster  v.  Pain,  41  N.  Y.  App. 
Div.    443,    58    Supp.    865;    McKay's 
Case,  L.  R.  2  Ch.  Div.  1,  5;  Emma 
Silver  Mining  Co.  v.  Grant,  L.  R.  11 
Ch.  Div.  918,  938 ;  Bentley  v.  Craven, 
18  Beav.  75,  78. 

But  see  Bagnall  v.  Carlton,  L.  R. 
6  Ch.  Div.  371.  In  that  case  the 
title  to  certain  collieries  and  iron 
works  was  in  Joseph  Naylor,  W.  S. 
Naylor  and  another,  as  trustees 
under  the  will  of  James  Bagnall, 
Richard  Bagnall  was  the  life  tenant 
of  the  property.  Richard  Bagnall 
agreed  to  give  to  one  Duignan,  sol- 
icitor for  the  trustees,  a  commission 
of  £1,500,  if  he  found  a  purchaser 
for  the  property.  Accordingly  a  cor- 
poration was  organized  to  take  over 
the  property  and  the  court  held 
that  Duignan  and  the  trustees  under 
the  will  of  James  Bagnall,  and  a 
number  of  other  persons,  were  all 


promoters  of  the  corporation.  It 
appeared  that  the  Naylors,  trustees 
under  the  will  of  James  Bagnall, 
had  as  a  condition  of  their  signing 
the  agreement  for  the  sale  of  the 
property,  insisted  upon  the  payment 
to  them  by  Richard  Bagnall,  the  life 
tenant,  of  two  sums  of  £6,000  and 
an  annuity  of  £500  each,  for  a  term. 
In  a  suit  to  compel  the  various  pro- 
moters to  account  for  secret  profits, 
it  was  held  that  the  agreement  just 
referred  to  was  a  personal  engage- 
ment of  Richard  Bagnall,  to  be  satis- 
fied out  of  his  own  moneys,  and 
that  the  corporation  was  not  en- 
titled to  recover  the  payments  made 
thereunder.  The  court  also  held 
that  the  company  was  not  entitled 
to  recover  the  £1,500  paid  to  Duig- 
nan by  Richard  Bagnall,  as  that 
sum  never  formed  any  part  of  the 
funds  of  the  company,  but  was  paid 
by  Richard  Bagnall  in  respect  to  a 
personal  liability,  and  out  of  his 
own  pocket.  The  case  must,  if  it  is 
to  be  approved,  rest  upon  the  par- 
ticular facts.  Cf.  Richard  Hanlon 
Millinery  Co.  v.  Mississippi  Trust 
Co.,  251  Mo.  553,  591,  158  S.  W.  359, 
368. 


SECRET  PROFITS. 


181 


property  which  the  corporation  is  organized  to  acquire,  and  the 
subsequent  resale  thereof  to  the  corporation  at  an  advance.27 
Sometimes  title  to  the  property  is  actually  taken  by  the  promot- 
ers, and  by  them  conveyed  to  the  corporation.  Sometimes  the 
promoters  merely  contract  for  the  purchase  of  the  property,  or 
take  an  option  thereon,  and,  after  arranging  a  resale  to  the  cor- 
poration at  an  increased  price,  cause  the  title  to  pass  from  the 
original  vendors  directly  to  the  corporation.  The  substance  of 
the  transaction  is  in  either  case  the  same,  and  the  profit  unlawful.28 
If  the  purchase  is  made  by  the  promoters  at  a  time  when  they  have 
entered  upon  their  fiduciary  relation  to  the  corporation,  it  is 
their  duty  to  make  the  purchase  for  the  corporation  upon  the  best 
terms  obtainable,  and  if,  in  disregard  of  their  duty,  they  pur- 
chase for  their  individual  account  what  they  ought  to  purchase  for 
the  corporation,  any  profit  obtained  upon  a  subsequent  resale  to 
the  corporation  is,  unless  fully  disclosed,  wrongfully  taken.29 


27.  Federal. — D  ickerman  v. 
Northern  Trust  Co.,  176  U.  S.  181, 
20  Sup.  Ct.  311,  44  L.  Ed.  423; 
Yeiser  v.  U.  S.  Board  &  Paper  Co., 
107  Fed.  Rep.  340,  46  C.  C.  A.  567,  52 
L.  R.  A.  724. 

California. — Lomita  Land  & 
Water  Co.  v.  Robinson,  154  Cal.  36, 
97  Pac.  10,  18  L.  R.  A.  N.  S.  1106. 

Iowa.— Hinkley  v.  Sac  Oil  &  Pipe 
Line  Co.,  132  Iowa  396,  107  N.  W. 
629,  119  Am.  St.  Rep.  564;  Caf- 
fee  v.  Berkley,  141  Iowa  344,  118  N. 
W.  267,  and  cases  cited. 

Missouri. — Exter  v.  Sawyer,  146 
Mo.  302,  47  S.  W.  951. 

New  Jersey. — Arnold  v.  Searing, 
78X  N.  J.  Eq.  146,  78  Atl.  762; 
Loudenslager  v.  Woodbury  Heights 
Land  Co.,  58  N.  J.  Eq.  556,  43  Atl. 
671;  See  v.  Heppenheimer,  69  N.  J. 
Eq.  36,  61  Atl.  843. 

New  York. — Crowe  v.  Malba  Land 


Co.,  76  Misc.  676,  135  Supp.  454; 
Dorris  v.  French,  4  Hun  292,  and 
cases  cited  in  foot  note,  p.  296. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  96  Pac.  528. 

Pennsylvania. — Densmore  Oil  Co. 
v.  Densmore,  64  Pa.  43,  50;  Simons 
v.  Vulcan  Oil  &  Min.  Co.,  61  Pa.  202, 
218,  100  Am.  Dec.  628. 

Wisconsin. — Pietsch  v.  Milbrath, 
123  Wis.  647,  101  N.  W.  388,  102  N. 
W.  342,  68  L.  R.  A.  945,  107  Am.  St. 
Rep.  1017. 

United  Kingdom  and  Colonies. — 
Minister  of  Rys.  &  Canals  v.  Quebec 
So.  Ry.  Co.,  12  Exch.  Rep.  of  Can. 
11. 

28.  In   re   Hess   ManTg   Co.,   23 
Can.  S.  C.  644,  659. 

29.  Old    Dominion  '  Copper,    etc., 
Co.  v.  Bigelow,  188  Mass.  315,  321, 
74  N.  E.  653,  108  Am.  St.  Rep.  479; 
Simons  v.  Vulcan  Oil  &  Min.  Co.,  61 


THE  LAW  OF  PROMOTERS. 

An  entirely  different  situation  arises  if  the  property  sold  to  the 
corporation  was  acquired  by  the  promoters  before  they  entered 
upon  any  fiduciary  relation  to  the  corporation.  They  are  in  such 
case  bound  to  disclose  their  interest  in  the  property,  but  its  cost 
to  them  is  wholly  immaterial,  and  while  the  transaction  may,  be- 
cause of  a  failure  to  disclose  the  promoters'  interest,  be  Unlawful, 
the  promoters  have  not,  properly  speaking,  taken  any  "  secret 
profit."  30 

An  ingenious  method  of  gaining  a  secret  profit  was  tried  in 
Gluckstein  v.  Barnes.31  In  that  case  a  mortgage  upon  a  place 
of  entertainment  known  as  "  Olympia,"  and  some  debenture 
bonds  of  the  company  which  then  owned  the  property,  were 
purchased  at  a  discount  by  the  promoters.  The  property 
was  then  sold  at  public  auction  and  bought  in  by  the  pro- 
moters at  £140,000,  that  price  being  sufficient  to  pay  the 
face  value  of  the  mortgage  and  debenture  bonds.  The  prop- 
erty was  sold  to  the  new  company  for  £180,000,  the  promot- 
ers disclosing  that  they  were  retaining  as  their  profit,  the  differ- 
ence between  the  £140,000  paid  at  the  public  sale  and  the  £180,- 
000  paid  by  the  corporation.  The  promoters  did  not,  however, 
disclose  the  fact  of  their  prior  purchase  at  a  discount  of  the  mort- 
gage and  debenture  bonds,  which  purchase  had  netted  them  an 
additional  profit  of  £20,000.  The  court  held  that  ^he  corporation 
was  entitled  to  the  benefit  of  the  purchase  of  the  mortgage  and 
debenture  bonds,  and  that  the  promoters  must  account  to  it  for 
the  £20,000  profit  gained  thereby. 

§96.  Secret  collateral  agreements. 

A  secret  agreement  whereby  a  proposed  contractor  with  a  cor- 

Pa.  202,  217,  (quoting  from  Lindley      re  Ambrose  Lake  Tin  &  Copper  Min- 
on   Partnership,  497)  ;    In  re   Cape      ing  Co.,  L.  R.  14  Ch.  Div.  390,  398. 
Breton  Co.,  L.  R.  29  Ch.  Div.  795,          30.  See  post,  §  101. 
803-804,  affirmed,  sub  nom.  Bentinck         31.  1900  App.  Cas.  240,  affirming, 
v.  Fenn,  L.  R.  12  App.  Cas.  652 ;  In      In  re  Olympia,  Ltd.,  1898,  2  Ch.  Div. 

153. 


SECRET  PROFITS.  133 

poration  in  process  of  formation,  promises  to  pay  a  commission 
to  the  promoter,  is  unlawful.32 

A  secret  collateral  agreement  with  a  contractor  who  has  obli- 
gated himself  to  pay  the  expenses  of  the  corporate  organization,, 
that  the  promoters  will,  in  consideration  of  the  payment  to  therm 
of  a  certain  fixed  sum,  assume  the  burden  of  organizing  the  com- 
pany is  improper,  and  any  profits  accruing  to  the  promoters 
therefrom  must  be  accounted  for  to  the  corporation.33 

The  failure  of  the  promoters  to  disclose  to  the  subscribers  that 
the  corporation  is,  under  an  agreement  with  one  of  the  promoters* 
obligated  to  pay  to  such  promoter  a  royalty  upon  a  certain 
patented  device  to  be  manufactured  and  sold  by  the  company,, 
renders  the  royalty  agreement  unenforceable  and  subject  to  can- 
cellation.34 

§  97.  Profits  made  in  sustaining  the  market. 

Emma  Silver  Mining  Co.  v.  Grant  35  was  an  action  to  compel 
the  defendant  to  account  for  a  secret  commission  obtained  by  him- 
The  defendant  had,  in  order  to  sustain  the  market,  dealt  in  the 
shares  of  the  plaintiff  corporation.  The  net  result  of  his  dealing 
in  these  shares  was  a  small  profit.  The  court  upon  his  accounting 
charged  the  defendant  with  this  profit.  The  defendant  had  in  that, 
case  claimed,  and  been  allowed  as  an  off-set  upon  his  accounting,, 
sums  of  money  paid  to  various  brokers  for  sustaining  the  market.,, 
and  that  no  doubt  was  the  reason  why  he  was  charged  with  the 
profits  derived  from  these  transactions.  If  a  promoter,  in  order 
to  sustain  the  price  of  the  company's  shares,  should  on  his  own 

32.  Twycross   v.   Grant,   L.    R.   2      Sess.  Cas.  20  Rettie,  7,  9  Times  Law 
C.  P.  D.  469 ;  see  also  London  Trust      Rep.  102,  68  L.  T.  N.  S.  96,  afflrm- 
Co.  v.  Mackenzie,  62  L.  J.  Ch.  N.  S.      ing,  Sess.  Cas.  18  Rettie,  1140. 

870;  In  re  Anglo  Greek  Steam  Co.,  34.  Fred  Macey  Co.  v.  Macey,  143 

L.  R.  2  Eq.  1,  8-9,  35  Beav.  399,  409-  Mich.  138,  106  N.  W.  722,  5  L.  R.  A. 

410.  N.  S.  1036. 

33.  Mann  v.  Edinburgh  Northern  35.  L.   R.   11   Ch.   Div.   918,  941* 
Tramways  Co.,  1893,  App.  Cas.  69,  940. 


THE  LAW  OF  PROMOTERS. 

responsibility,  with  his  own  money,  and  at  his  own  risk,  buy  and 
sell  such  shares  in  the  market,  the  profits,  if  any,  derived  from 
such  transactions  would  belong  to  the  promoter  and  he  could  not  be 
called  upon  to  account  therefor.  A  different  situation  would  arise 
if  the  promoter  had  represented  that  he  was  trading  for  the  corpo- 
ration, or  had  attempted  to  hold  the  corporation  responsible  for 
his  losses,  or  had  made  use  of  the  funds  of  the  corporation  in  his 
operations. 

§  98.  Other  collateral  profits. 

A  curious  situation  arose  in  Re  Sunlight  Incandescent  Gas 
Light  Co.,  Ltd.36  Pending  the  organization  of  a  company  formed 
to  purchase  a  certain  invention,  a  litigation  arose  between  the 
vendor  corporation  and  a  syndicate  formed  to  test  the  invention 
to  be  purchased  by  the  new  company.  The  syndicate  having  suc- 
ceeded in  the  first  stage  of  the  litigation,  and  the  vendor  company 
having  threatened  an  appeal,  it  was  arranged  to  secure  the  syndi- 
cate against  the  threatened  appeal  by  insuring  the  result  at 
Lloyd's.  Two  of  the  directors  of  the  syndicate  underwrote  a  part 
of  the  risk.  Thereafter  the  vendor  corporation  abandoned  the 
appeal.  It  was  claimed  by  the  liquidator  that  the  syndicate  was 
•entitled  to  recover  from  the  two  directors  who  underwrote  a  part 
•of  the  risk,  as  profits  made  in  the  conduct  of  the  company's  affairs, 
the  premiums  paid  to  them  for  the  insurance.  The  court,  with- 
out attempting  to  declare  any  general  rule,  declined  to  hold  the 
directors  liable  for  these  moneys,  largely  because  of  the  fact  that 
most  of  the  shareholders  did  not  want  the  money  and  would  have 
returned  it  to  the  directors.  The  court  said,  however,  that  a  full 
and  detailed  disclosure  of  the  transaction  should  have  been  made. 

§  99.  Profits  of  business  carried  on  with  existing  concern  pend- 
ing incorporation. 
In  Albion  Steel  &  Wire  Co.  v.  Martin,37  the  plaintiff  corpora- 

36.  16  Times  Law  Rep.  535.  37.  L.  R.  1  Ch.  Div.  580. 


SECRET  PROFITS.  185 

tion  was  organized  to  take  over  the  business  of  Fox  &  Bear  as  of 
September  1,  1872.  The  defendant,  a  steel  converter  and  iron 
merchant  doing  a  large  business  with  Fox  &  Bear,  agreed  to  be- 
come a  director  of  the  new  company,  but  pending  the  incorpo- 
ration, and  after  September  1,  1872,  and  likewise  •  after  the 
incorporation  of  the  company  on  October  31,  1872,  continued  to 
transact  business  with  Fox  &  Bear  in  the  same  manner  as  there- 
tofore. The  defendant  admitted  his  liability  to  account  for  the 
profits  derived  from  the  contracts  made  with  Fox  &  Bear  after  the 
incorporation.  He  contended,  however,  that  he  was  entitled  to 
retain  his  profits  on  all  contracts  made  before  the  incorporation. 
This  contention  was  sustained.  The  defendant  was  apparently 
not  one  of  the  promoters  of  the  plaintiff  corporation,  but,  had  he 
been,  that  circumstance  would  not  have  affected  the  result. 

§  100.  Absence  of  dishonest  intent,  or  of  injury  to  the  corpo- 
ration, immaterial. 

If  the  promoter  takes  his  profit  without  a  proper  disclosure,  he 
will  be  compelled  to  account  therefor,  though  no  fraud  or  in- 
justice was  intended,38  and  though  he  honestly  believes  that  the 
profits  so  taken  by  him  do  not  exceed  the  reasonable  value  of  his 
services  as  promoter.39 

The  promoter  is  not  relieved  from  liability  for  his  secret  profits 
by  the  fact  that  the  property  sold  to  the  corporation  was  actually 
worth  the  price  that  it  was  made  to  pay  therefor,40  nor  because 

38.  Chandler   v.    Bacon,   30   Fed.  39.  Hayward  v.  Leeson,  176  Mass. 

Rep.    538,    540;    Torrey    v.    Toledo  310,  318-319,  57  N.  E.  656,  49  L.  R. 

Portland  Cement  Co.,  158  Mich.  348,  A.  725. 

122  N.  W.  614;  Dorris  v.  French,  4  40.  Federal. — Yeiser     v.     U.      S. 

Hun  (N.  Y.)   292,  297;  Erlanger  v.  Board  &  Paper  Co.,  107  Fed.  Rep. 

New  Sombrero  Phosphate  Co.,  L.  R.  340,  348-349,  46  C.  C.  A.  567,  52  L. 

3  App.  Cas.  1218,  1256-1257,  6  Eng.  R.   A.   724;   Chandler  v.   Bacon,  30 

Rul.  Cas.  777,  39  L.  T.  N.  S.  269,  27  Fed.  Rep.  538,  540. 

W.    R.    65;    Nant-Y-Glo    &    Blalna  Alabama. — Moore  v.  Warrior  Coal 

Ironworks  Co.   v.   Grave,   L.   R.   12  &  Land  Co.,  178  Ala.  234,  59  So.  219, 

Ch.  Div.  738,  746.  Am.  &  Eng.  Ann.  Cas.,  1915  B.  173. 


186 


THE  LAW  OF  PROMOTERS. 


his  profits  were  not  received  at  the  expense  of  the  corporation.41 
Even  if,  as  might  well  happen,  the  secret  commissions  paid  to  the 
promoter  had  enabled  the  corporation,  by  bringing  suit  for  a  re- 
scission against  its  vendor,  to  obtain  a  compromise  which  allowed 
it  to  retain  the  property  at  a  net  cost  lower  than  the  lowest  price 
at  which  it  could  have  been  purchased,  that  circumstance  would 
not  relieve  the  promoter  from  liability  to  the  corporation,  al- 
though it  was  undoubtedly  the  gainer  by  the  fraud  of  which 
it  complains.42  The  basis  of  the  promoter's  liability  for  secret 
profits  is,  not  that  the  corporation  has  been  damaged  to  the  ex- 
tent of  his  secret  profit,  but  that  the  promoter  occupies  a  posi- 
tion analogous  to  that  of  agent  of  the  corporation,  and  that  any 
profits  resulting  from  his  dealings  with  the  corporation  must  be 
accounted  for  to  it.43 


California. — Burbank  v.  Dennis, 
101  Cal.  90,  101,  35  Pac.  444,  448. 

Connecticut. — Yale  Gas  Stove  Co. 
v.  Wilcox,  64  Conn.  101,  121,  125,  29 
Atl.  303,  25  L.  R.  A.  90,  42  Am.  St. 
Rep.  159,  47  Am.  &  Eng.  Corp.  Gas. 
647. 

New  Jersey. — Bigelow  v.  Old  Do- 
minion Copper,  etc.,  Co.,  74  N.  J. 
Eq.  457,  500,  503,  71  Atl.  153. 

New  fork. — Midwood  Park  Co.  v. 
Baker,  128  Supp.  954,  affirmed,  144 
App.  Div.  939,  129  Supp.  1135, 
affirmed,  207  N.  Y.  675,  100  N.  E. 
1130. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  81,  96  Pac.  528,  532. 

United  Kingdom  and  Colonies. — 
Bentley  v. .  Craven,  18  Beav.  75; 
Hichens  v.  Congreve,  4  Sim.  420,  427, 
cited  in  Gluckstein  v.  Barnes,  1900, 
App.  Gas.  240,  252-254;  Alexandra 
Oil  &  Dev.  Co.  v.  Cook,  11  Ont.  W. 
R.  1054,  1061. 


41.  Archer's    Case,    1892,    1    Ch. 
Div.  322.    See  opinion  of  Lindley,  L. 
J.,  p.  339,  Bowen,  L.  J.,  p.  340-341, 
and  of  Fry,  L.  J.,  p.  342.    Compare, 
however,  Richard  Hanlon  Millinery 
Co.  v.  Mississippi  Valley  Trust  Co., 
251  Mo.  553,  591,  158  S.  W.  359,  368 ; 
also  Bagnall  v.  Carlton,  L.  R.  6  Ch. 
Div.  371. 

42.  Emma  'Silver   Mining   Co.   v. 
Grant,  L.  R.  11  Ch.  Div.  918,  938. 
See  also  Bagnall  v.  Carlton,  L.  R. 
6  Ch.   Div.   371,   399-^00,   404.     Cf. 
Stoney  Creek  Woolen  Co.  v.  Smalley, 
111  Mich.  321,  69  N.  W.  722,  citing 
1  Am.  &  Eng.  Ency.  of  Law   (2nd. 
ed.),  428. 

43.  McKay's   Case,   L.    R.    2   Ch. 
Div.  1,  5 ;  Emma  Silver  Mining  Co. 
v.   Grant,   L.   R.   11   Ch.   Div.   918; 
Bentley  v.  Craven,  18  Beav.  75,  78. 
Cf.  Richard  Hanlon  Millinery  Co.  v. 
Mississippi    Valley    Trust    Co.,    251 
Mo.  553,  591,  158  S.  W.  359,  368. 


SECRET  PROFITS.  187 

The  fact  that  the  shares  taken  by  the  promoter  were  issued  to 
him  as  full  paid  in  compliance  with  the  statutes  of  the  domicile  of 
the  corporation,  has  no  bearing  upon  the  propriety  of  his  secret 
profit  or  upon  his  right  to  retain  the  shares  as  against  the  com- 
plaint of  the  corporation  or  its  stockholders.44 

§  101.  Distinction  between  "secret  profits,"  and  sale  of  pro- 
moter's property  to  the  corporation. 

It  is  necessary,  in  considering  the  question  of  promoters'  profits 
and  the  right  of  a  promoter  to  deal  with  the  corporation  to  his 
personal  advantage,  to  keep  in  mind  the  distinction  between  the 
profits  derived  by  a  purchase  of  property  by  the  promoter  and 
its  resale  to  the  corporation,  and  a  mere  sale  of  the  promoter's 
property  to  the  corporation.  The  distinction  is  that  in  the  one 
case  the  promoter  makes  the  purchase  for  himself  at  a  time  when 
it  is  his  duty  to  make  it  for  the  corporation;  in  the  other,  he 
merely  sells  his  own  property  to  a  purchaser  to  which  he  stands 
in  a  fiduciary  relation.  If  the  facts  are  concealed,  the  promoter 
has  in  the  one  case  gained  an  unlawful  secret  profit, — in  the  other 
made  a  voidable  sale.45  If  the  promoter's  purchase  is  made  at  a 

44.  Hay  ward  v.  Leeson,  176  Mass.  530,  125  Pac.  286,  and  see  -post,  §§ 

310,  317-318,  57  N.  E.  656,  49  L.  R.  165,  270. 

A.   725;   Bigelow  v.   Old   Dominion  45.  California. — Burbank  v.  Den- 
Copper,  etc.,  Co.,  74  N.  J.  Eq.  457,  nis,  101  Cal.  90,  97-99,  35  Pac.  444, 
503,  71  Atl.  153,  and  see  post,   §§  446-447. 
165,  270.  Massachusetts. — O  1  d       Dominion 

If  bonds  or  shares  are,  in  violation  Copper  Co.   v.   Bigelow,   188  Mass, 

of  statute,  issued  to  the  promoters  315,  321,  322,  74  N.  E.  653,  108  Am. 

without  adequate  consideration,  the  St.  Rep.  479;  Parker  v.  Nickerson, 

promoter  will  be  subjected  to  such  137  Mass.  487,  497. 

penalties    as    may    be    prescribed  Missouri. — See  Exter   v.   Sawyer, 

by  the  statute.     Wiegand  v.  Albert  146  Mo.  302,  320-321,  47  S.  W.  951, 

Lewis    Lumber    &    Mfg.    Co.,    158  955-6. 

Fed.    Rep.    608,    85   C.    C.    A.    430,  New  Jersey. — Plaquemines  Tropi- 

affirming  In  re  Wyoming  Valley  Ice  cal  Fruit  Co.  v.  Buck,  52  N.  J.  Eq. 

Co.,  153  Fed.  Rep.  787 ;  McAllister  219,  230,  27  Atl.  1094,  44  Am.  &  Eng. 

v.  American  Hospital  Ass'n,  62  Or.  Corp.  Cas.  686;  Woodbury  Heights 


188 


THE  LAW  OF  PROMOTERS. 


time  when  he  already  occupies  a  fiduciary  relation  towards  the 
corporation,  the  price  which  he  pays  for  the  property  directly 
affects  the  rights  of  the  corporation  in  the  transaction.  If  the 
property  was  acquired  by  the  promoter  before  he  entered  upon 
that  relation  to  the  corporation,  the  cost  of  the  property  to  him 
does  not  concern  the  corporation.46 

§  102.  Restrictions  upon   sale   of  promoter's  property  to  the 

corporation. 

The  promoter  may,  if  his  interest  in  the  transaction  is  properly 
disclosed,  freely  sell  his  own  property  to  the  corporation  regard- 
less of  its  cost  to  him.47  He  must  not,  however,  if  he  is  himself 


Land  Co.  v.  Loudenslager,  55  N.  J. 
Eq.  78,  90-91,  35  Atl.  436,  affirmed, 
56  N.  J.  Eq.  411,  41  Atl.  1115,  but 
modified,  58  N.  J.  Eq.  556,  43  Atl. 
671. 

Ohio. — Second  National  Bank  v. 
Greenville  Screw  Point  Steel  Fence 
Post  Co.,  23  Ohio  C.  C.  274,  279. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  81,  96  Pac.  528,  531. 

Pennsylvania. — Densmore  Oil  Co. 
v.  Densmore,  64  Pa.  43,  49;  Mc- 
Elhenny's  Appeal,  61  Pa.  188,  195. 

Virginia. — Richlands  Oil  Co.  v. 
Morriss,  108  Va.  288,  294,  61  S.  E. 
762,  764,  quoting  Cook  on  Corpora- 
tions, §  651. 

Wisconsin. — Milwaukee  Cold  Stor- 
age Co.  v.  Dexter,  99  Wis.  214, 
74  N.  W.  976,  40  L.  R.  A.  837; 
Franey  v.  Warner,  96  Wis.  222,  233- 
236,  71  N.  W.  81,  85-86,  and  cases 
cited. 

United  Kingdom  and  Colonies: — 
Foss  v.  Harbottle,  2  Hare  461,  489; 
Cover's  Case,  L.  R.  20  Eq.  114,  122, 
affirmed,  L.  R.  1  Ch.  Div.  182,  (see 


p.  187)  ;   Bagnall  v.  Carlton,  L.  R. 

6  Ch.  Div.  371,  386;  Paul  &  Beres- 
ford's  Case,  33  Beav.  204;  Erlanger 
v.  New  Sombrero  Phosphate  Co.,  L. 
R.    3    App.    Cases    1218,    1242-1243, 
1244,   1263,  1270,   6  Eng.   Rul.   Gas. 
777,  39  L.  T.  N.  S.  269,  27  W.  R.  65 ; 
In  re  Hess  Manufacturing  Co.,  23 
Can.  Sup.  Ct.  644,  affirming,  21  Ont. 
App.    66,    reversing,    23    Ont.    182; 
Highway   Advertising   Co.    v.   Ellis, 

7  Ont.  L.  R.  504. 

Note  to  Yale  Gas  Stove  Co.  v. 
Wilcox,  25  L.  R.  A.  90. 

46.  See  post,  §  115. 

47.  See  post,  §  115. 

A  loan  of  money  made  to  the  cor- 
poration by  the  promoter  is,  if  the 
transaction  is  open  and  fair,  not 
subject  to  objection.  See  Fitzgerald 
Construction  Co.  v.  Fitzgerald,  137 
U.  S.  98,  110,  34  L.  Ed.  608,  11  Sup. 
Ct.  36,  and  cases  cited.  Reid  on  Cor- 
porate Finance,  §  190.  Even  though 
the  transaction  were  in  some  way 
objectionable,  the  remedy  of  the 
corporation  would  generally  be  con- 


SECRET  PROFITS. 


189 


the  vendor  on  the  sale  to  the  corporation,  attempt,  without  disclos- 
ing his  interest,  to  influence  the  action  of  the  vendee  corporation.48 
He  must  make  a  full  disclosure  of  all  the  material  facts,49  either  to 


fined  to  a  rescission,  which  would 
necessitate  the  repayment  of  the 
moneys  received  by  it,  and  interest. 
It  is,  however,  conceivable  that 
peculiar  facts  might  give  the  trans- 
action an  aspect  that  would  justify 
other  remedies.  The  court  might, 
for  example,  not  permit  the  pro- 
moter to  realize  upon  his  security. 
See  Reid  on  Corporate  Finance,  § 
190. 

48.  Connecticut. — Yale  Gas  Stove 
Co.  v.  Wilcox,  64  Conn.  101,  121,  29 
Atl.  303,  25  L.  R.  A.  90,  42  Am.  St. 
Rep.  159,  47  Am.  &  Eng.  Corp.  Gas. 
647. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  322,  74  N.  E.  653,  108 
Am.  St.  Rep.  479 ;  same  v.  same,  203 
Mass.  159,  89  N.  E.  193,  40  L.  R.  A. 
N.  S.  314;  Parker  v.  Nickerson,  112 
Mass.  195,  196;  same  v.  same,  137 
Mass.  487,  497. 

Missouri. — South  Joplin  Land 
Co.  v.  Case,  104  Mo.  572,  578-579, 
16  S.  W.  390,  392,  38  Am.  &  Eng. 
Corp.  Gas.  333. 

New  York. — Munson  v.  Syracuse, 
etc.,  R.  R.  Co.,  103  N.  Y.  58,  73,  8 
N.  E.  355,  29  Am.  &  Eng.  R.  R.  Gas. 
377;  Coleman  v.  Second  Ave.  R.  R. 
Co.,  38  N.  Y.  201. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  78-79,  96  Pac.  528, 
531. 

Pennsylvania. — Rice's  Appeal,  79 
Pa.  168,  205. 

Wisconsin. — Pittsburg  Mining  Co. 


v.  Spooner,  74  Wis.  307,  319-320,  42 
N.  W.  259,  262,  17  Am.  St.  Rep.  149, 
24  Am.  &  Eng.  Corp.  Gas.  1;  Mil- 
waukee Cold  Storage  Co  v.  Dexter, 
99  Wis.  214,  74  N.  W.  976,  40  L.  R. 
A.  837. 

United  Kingdom  and  Colonies. — 
In  re  Cape  Breton  Co.,  L.  R.  29  Ch. 
D.  795,  affirmed,  sub  nom.  Bentinck 
v.  Fenn,  L.  R.  12  App.  Gas.  652 ;  Foss 
v.  Harbottle,  2  Hare  461 ;  Lagunas 
Nitrate  Co.  v.  Lagunas  Syndicate, 
1899,  2  Ch.  392,  422,  442,  per  Rigby, 
L.  J.,  who  was,  however,  in  the 
minority  on  the  decisive  points  of 
the  case. 

See  note  to  Lomita  Land  &  Water 
Co.  v.  Robinson,  18  L.  R.  A.  N.  S.^ 
1112-1113. 

49.  Federal. — Stewart  v.  St.  Louis 
Ft.  S.  &  W.  R.  Co.,  41  Fed.  Rep.  736, 
738. 

Massachusetts. — Parker  v.  Nicker- 
son, 112  Mass.  195,  196;  Old  Do- 
minion Copper,  etc.,  Co.  v.  Bigelow, 
188  Mass.  315,  322,  74  N.  E.  653, 
108  Am.  St.  Rep.  479. 

Missouri. — South  Joplin  Land  Co. 
v.  Case,  104  Mo.  572,  579,  16  S.  W. 
390,  392,  38  Am.  &  Eng.  Corp.  Gas. 
333;  Exter  v.  Sawyer,  146  Mo.  302, 
321-322,  47  S.  W.  951,  956. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  76-77,  96  Pac.  528, 
531. 

Wisconsin. — Milwaukee  Cold  Stor- 
age Co.  v.  Dexter,  99  Wis.  214, 
74  N.  W.  976,  40  L.  R.  A.  837; 
Pittsburg  Mining  Co.  v.  Spooner,  74 


190 


THE  LAW  OF  PROMOTERS. 


a  competent  and  independent  board  of  directors  50  so  that  they 
may  exercise  an  independent  judgment  as  to  the  advisability  of 
making  the  purchase,  or  else  to  every  subscriber  51  so  that  each 
subscriber  may,  with  knowledge  of  the  facts,  decide  for  himself 
whether  or  not  he  desires  to  come  in. 

If  the  promoter  sells  his  own  property  to  the  corporation  with- 
out a  sufficient  disclosure  of  his  interest  in  the  transaction,  neither 
the  fact  that  no  fraud  or  injustice  was  intended,52  nor  the  fact 
that  the  price  at  which  the  property  was  sold  to  the  corporation 
was  fair  and  reasonable,53  constitutes  a  defense  to  its  complaint. 

The  promoter  must  also,  it  has  been  held,  in  any  event  satisfy 


Wis.  307,  42  N.  W.  259,  17  Am.  St. 
R.  149,  24  Am.  &  Eng.  Corp.  Gas.  1. 

United  Kingdom  and  Colonies. — 
New  Sombrero  Phosphate  Co.  v. 
Erlanger,  L.  R.  5  Ch.  Div.  73,  118, 
25  W.  R.  436,  affirmed,  *u6  nom. 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Gas.  1218, 
1236,  6  Eng.  Rul.  Cas.  777,  39  L.  T. 
N.  S.  269,  27  W.  R.  65;  In  re  Cape 
Breton  Co.,  L.  R.  29  Ch.  D.  795, 
affirmed,  sub  nom.  Bentinck  v.  Fenn, 
L.  R.  12  App.  Cas.  652. 

Cf.  Heckscher  v.  Edenborn,  131  N. 
Y.  App.  Div.  253,  258,  115  Supp. 
673,  followed,  137  N.  Y.  App.  Div. 
899,  122  Supp.  1131,  which  is,  how- 
ever, reversed,  203  N.  Y.  210,  96  N. 
E.  441. 

50.  See  post,  §§  109,  110,  119. 

51.  See  post,  §§  109,  111,  119. 

52.  Erlanger    v.    New    Sombrero 
Phosphate  Co.,   L.   R.   3   App.   Cas. 
1218,  1256,  6  Eng.  Rul.  Cas.  777,  39 
L.  T.  N.   S.  269,  27  W.  R.  65;  La- 
gunas  Nitrate  Co.  v.  Lagunas  Syndi- 
cate, 1899,  2  Ch.  Div.  392,  461^62, 
by  Rigby,  L.  J.,  who  dissented  from 


his  associates  upon  the  decisive 
points  of  the  case. 

53.  Lagunas  Nitrate  Co.  v.  La- 
gunas Syndicate,  1899,  2  Ch.  Div. 
392,  450,  451,  per  Rigby,  L.  J.,  who 
dissented  from  his  associates  on  the 
decisive  points  of  the  case. 

The  fact  that  the  property  was 
actually  worth  the  price  at  which 
it  was  sold  to  the  corporation  would, 
in  case  the  corporation  sued  for 
damages,  limit  its  recovery  'to 
nominal  damages.  See  Bentinck  v. 
Fenn,  L.  R.  12  App.  Cas.  652,  659, 
661,  662,  affirming,  In  re  Cape 
Breton  Co.,  L.  R.  29  Ch.  D.  795, 
affirming,  L.  R.  26  Ch.  D.  221.  Quoted 
in  Milwaukee  Cold  Storage  Co.  v. 
Dexter,  99  Wis.  214,  230,  74  N.  W. 
976,  40  L.  R.  A.  837,  842. 

The  burden  of  proof  is,  in  such 
case,  upon  the  corporation  to  show 
that  damages  were  in  fact  suffered. 
Bentinck  v.  Fenn,  supra,  at  page 
659.  And  see  Continental  Securities 
Co.  v.  Belmont,  83  N.  Y.  Misc.  340, 
144  Supp.  801,  affirmed,  168  N.  Y. 
App.  Div.  483,  154  Supp.  54. 


SECRET  PROFITS. 


191 


himself  that  the  property  he  sells  to  the  corporation,  is,  at  the 
time  of  its  sale,  reasonably  worth  the  price  which  he  obtains  from 
the  corporation  therefor.54 

In  Jenkins  v.  Bradley,55  the  promoters  in  good  faith,  and  with- 
out concealment,  conveyed  to  the  corporation  by  quit  claim  deeds, 
certain  property  the  title  to  which  was  afterwards  found  to  be  in 
part  defective.  They  were  treated  by  the  court  as  having  paid 
upon  the  shares  issued  to  them  in  payment  for  the  property,  only 
the  sum  represented  by  the  value  of  the  property  to  which  they 
had  transferred  good  title,  and  made  to  pay  in  cash  the  balance 
of  the  price  at  which  they  received  the  shares.  This  decision  was 


54.  New  Sombrero  Phosphate  Co. 
v.  Erlanger.  L.  R.  5  Ch.  Div.  73,  97, 
25  W.  R.  436,  affirmed,  L.  R.  3  App. 
Cas.  1218,  6  Eng.  Rul.  Cas.  777,  39 
L.  T.  N.  S.  269,  27  W.  R.  65;  In  re 
Hess  Manufacturing  Co.,  23  Can.  S. 
C.  644,  657-658,  667-668;  Lagunas 
Nitrate  Co.  v.  Lagunas  Syndicate, 
1899,  2  Ch.  Div.  392,  410-411.  And 
see  Weber  v.  Nichols,  75  N.  J.  Eq. 
117,  75  Atl.  997. 

See  also  Tooker  v.  National  Sugar 
Reflning  Co.,  80  N.  J.  Eq.  305,  314, 
84  Atl.  10,  holding  that  value  added 
by  the  combination  of  the  control 
of  rival  plants  cannot  be  considered 
"  property "  within  the  meaning  of 
the  New  Jersey  Corporation  Laws, 
citing  See  v.  Heppenheimer,  69 
N.  J.  Eq.  36,  42,  61  Atl.  843. 

It  should  be  noted  that  while  the 
cost  of  the  property  to  the  promoters 
does  not  directly  concern  the  cor- 
poration, or  affect  the  validity  of 
the  transaction,  the  fact  that  the 
property  was  purchased  by  the  pro- 
moters a  short  time  before  at  a 
price  very  much  smaller  than  the 
price  charged  to  the  corporation,  has 


a  very  material  bearing  upon  the 
question  of  the  good  faith  of  the  pro- 
moters, and  upon  the  question 
whether  the  property  was  actually 
worth  the  price  at  which  it  was 
transferred  to  the  corporation. 
Wills  v.  Nehalem  Coal  Co.,  52  Or. 
70,  79-80,  96  Pac.  528,  532 ;  Downey 
v.  Finucane,  205  N.  Y.  251,  98  N.  E. 
391,  40  L.  R.  A.  N.  S.  307;  Cham- 
berlayne  on  the  Modern  Law  of 
Evidence,  §§  2159  and  2175c. 

Such  discrepancy  in  price  is  of 
course  open  to  explanation.  See 
Milwaukee  Cold  Storage  Co.  v. 
Dexter,  99  Wis.  214,  227-228,  74  N. 
W.  976,  40  L.  R.  A.  837,  841;  Ben- 
tinck  v.  Fenn,  L.  R.  12  App.  Cas. 
652,  659-660,  affirming,  In  re  Cape 
Breton  Co.,  L.  R.  29  Ch.  Div.  795, 
affirming,  L.  R.  26  Ch.  Div.  221. 

55.  104  Wis.  540,  80  N.  W.  1025. 

The  court  held  further  that  the 
promoters  could  not,  by  surrender- 
ing to  the  corporation  the  shares  re- 
ceived in  payment  for  the  interest 
to  which  they  did  not  have  good 
title,  relieve  themselves  from  fur- 
ther liability. 


192  THE  LAW  OF  PROMOTERS. 

put  upon  the  ground  that  while  a  purchaser,  in  the  absence  of 
warranty,  ordinarily  assumes  all  risks  as  to  the  title  of  real  prop- 
erty, yet  when  the  grantors  occupy  a  fiduciary  relation  to  the 
grantee,  and  the  parties  have  acted  in  ignorance  of,  or  under  a 
mistake  as  to,  their  antecedent  legal  rights,  a  court  of  equity 
may  grant  relief. 

§  103.  Necessity  of  determining  whether  promoter  acquired 
property  before,  or  after,  he  entered  upon  the  rela- 
tion of  promoter  to  the  corporation. 

A  sale  by  the  promoter  to  the  corporation  without  a  disclosure 
of  his  interest  is,  as  has  been  shown  in  preceding  sections,  unlawful, 
whether  the  promoter  acquired  the  property  before  or  after  he 
entered  upon  the  relation  of  promoter  to  the  corporation.  When, 
however,  it  is  said  that  the  promoter  in  the  one  case  takes  a  secret 
profit,  and  in  the  other  unlawfully  sells  his  property  to  the  cor- 
poration, the  distinction  is  by  no  means  one  of  words.  The  ex- 
tent of  the  disclosure  to  be  made  to  the  corporation,56  the  reme- 
dies to  be  pursued  by  it,57  and  the  measure  of  damages  when  money 
relief  is  sought,58  all  depend  upon  the  question  whether  the  pro- 
moter made  his  purchase  at  a  time  when  he  was  already  subject  to 
the  fiduciary  relation,  or  whether  he  acquired  the  property  before 
he  became  a  promoter. 

If  the  promoters  acquired  their  property  before  they  entered 
upon  the  fiduciary  relation  of  promoters  to  the  corporation,  it  is 
quite  immaterial  whether  they  acquired  the  property  just  before 
they  entered  upon  that  relation,  or  whether  they  had  owned  it  for 
thirty  years.59  The  substantial  rights  of  the  parties  may,  there- 
fore, depend  upon  the  determination  of  the  precise  moment  at 
which  the  promoters  became  such,  and  the  precise  moment  at  which 
they  acquired  the  property  under  consideration.  The  circum- 

56.  See  post,  §  115.  59.  In  re  Hess  Mfg.  Co.,  23  Can. 

57.  See  post,  §  161.  Sup.  Ct.  644,  657,  and  see  Cover's 

58.  See  post,  §  264.  Case,  L.  R.  1  Ch.  Div.  182,  192. 


SECRET  PROFITS.  193 

stances  which  determine  the  commencement  of  the  relation  of  pro- 
moter to  the  corporation  have  already  been  considered.60 

§  104.  What  is  deemed  acquisition  of  property. 

When  it  has  in  any  particular  case  been  determined  at  what 
moment  the  relation  of  promoter  to  the  corporation  had  its  in- 
ception, there  remains  for  determination  the  question  whether  the 
promoter  became  the  owner  of  the  property  sold  to  the  corpora- 
tion, before  or  after  that  moment.  It  is  not,  in  order  that  he  may 
be  considered  to  have  become  the  owner  of  the  property  before  he 
entered  upon  the  relation  of  promoter  to  the  corporation,  neces- 
sary that  he  should  before  that  time  have  actually  acquired  the 
legal  title.  The  complete  equitable  title  is,  of  course,  sufficient, 
and  the  promoter  will  be  considered  to  have  owned  the  property 
before  he  became  a  promoter,  if  he,  when  he  entered  upon  that  re- 
lation, held  an  enforceable  contract  for  its  purchase.61  The  mere 
holding  of  an  option  upon  the  property  does  not,  however,  entitle 
the  promoter  to  be  considered  the  owner  thereof.62  The  promoter 

60.  See  ante,  §§  15-18.  W.  R.  65,  affirming,  New  Sombrero 

61.  California. — Burbank  v.   Den-      Phosphate  Co.  v.  Erlanger,  L.  R.  5 
nis,  101  Cal.  90,  35  Pac.  444.  Ch.  Div.  73,  25  W.  R.  436 ;  Cover's 

New   Jersey. — Woodbury   Heights  Case,  L.  R.  1  Ch.  Div.  182,  187-188,. 

Land  Co.  v.  Loudenslager,  55  N.  J.  affirming,  L.  R.  20  Eq.  114. 

Eq.  78,  88,  35  Atl.  436,  affirmed,  56  That  the  promoters  never  did  take 

N.  J.  Eq.  411,  41  Atl.  1115,  but  modi-  title,  but  caused  the  deeds  to   runt 

fled,  58  N.  J.  Eq.  556,  43  Atl.  671.  from  the  original  vendor  directly  to 

Pennsylvania. — McElhenny's     Ap-  the  corporation,  is  immaterial.    Mc- 

peal,  61  Pa.  188,  195.  Elhenny's  Appeal,  61  Pa.  188. 

Wisconsin. — Milwaukee  Cold  Stor-  An  unenforceable  contract  subse- 

age  Co.  v.  Dexter,  99  Wis.  214,  227,  quently  performed  may  be  sufficient. 

74  N.  W.  976,  40  L.  R.  A.  837,  841.  See  Omnium  Electric  Palaces,  Ltd., 

United  Kingdom  and  Colonies. —  v.  Raines,  1914,  1  Ch.  Div.  332,  82 

Ladywell  Mining  Co.  v.  Brookes,  L.  L.  J.  Ch.  N.  S.  519,  109  L.  T.  N.  S. 

R.  35  Ch.  Div.  400,  409,  17  Am.  &  206. 

Eng.  Corp.  Gas.  22 ;  Erlanger  v.  New  62.  Federal. — Yeiser      v.      United 

Sombrero    Phosphate   Co.,   L.    R.   3  States  Board  &  Paper  Co.,  107  Fed. 

App.   Cas.   1218,   1234-1235,   6   Eng.  Rep.  340,  345,  347,  46  C.  C.  A.  567, 

Rul.  Cas.  777,  39  L.  T.  N.  S.  269,  27  52  L.  R.  A.  724. 


194 


THE  LAW  OF  PROMOTERS. 


shas,  whether  he  holds  a  contract  or  an  option  for  the  purchase  of 
the  property,  an  equal  right  and  power  to  acquire  the  legal  title. 
The  distinction  between  the  two  cases  lies  in  the  fact  that  the 
promoter  is  in  the  one  case  bound  in  any  event  to  complete  his  pur- 
chase, while  he  may  in  the  other  complete  the  purchase  if  the 
corporation  is  formed,  or  allow  the  option  to  laj>se  if  the  promo- 
tion proves  abortive.  He  assumes  when  he  makes  a  contract,  a 
personal  responsibility  for  the  completion  of  the  purchase,  and 
becomes  in  practical  effect  the  owner  of  the  property.  He  is 
ivhen  he  takes  an  option,  free  to  abandon  the  venture  at  any  time.63 
If  the  option  were  itself  a  thing  of  substantial  value,  and  the 


California. — Burbank  v.  Dennis, 
101  Cal.  90,  98,  35  Pac.  444 ;  Lomita 
I/and  &  Water  Co.  v.  Robinson,  154 
Cal.  36,  49,  97  Pac.  10,  18  L.  R.  A. 
N.  S.  1106,  1128. 

Indiana. — Parker  v.  Boyle,  178 
Ind.  560,  99  N.  E.  986. 

Iowa.— Hinkley  v.  Sac  Oil  &  Pipe 
Line  Co.,  132  Iowa,  396,  398,  107  N. 
W.  629,  630,  119  Am.  St.  R.  564. 

Missouri. — Exter  v.  Sawyer,  146 
Mo.  302,  321,  47  S.  W.  951,  956. 

New  Jersey. — Woodbury  Heights 
Land  Co.  v.  Loudenslager,  55  N.  J. 
Eq.  78,  87-88,  35  Atl.  436,  affirmed, 
56  N.  J.  Eq.  411,  41  Atl.  1115,  but 
modified,  58  N.  J.  Eq.  556,  43  Atl. 
'671. 

New  York. — Midwood  Park  Co.  v. 
Baker,  128  Supp.  954,  affirmed,  144 
App.  Div.  939,  129  Supp.  1135,  af- 
>firmed,  207  N.  Y.  675,  100  N.  E.  1130. 

Wisconsin. — Pietsch  v.  Milbrath, 
123  Wis.  647,  101  N.  W.  388,  102  N. 
^W.  342,  68  L.  R.  A.  945,  107  Am.  St 
Hep.  1017. 

See  note  to  Lomita  Land  &  Water 
Co.  v.  Robinson,  18  L.  R.  A.  N.  S. 
1114 


The  contrary  might  appear  from 
the  language  of  the  court  in  Old 
Dominion  Copper,  etc.,  Co.  v.  Bige- 
low,  203  Mass.  159,  202,  89  N.  E.  193, 
40  L.  R.  A.  N.  S.  314,  but  an  ex- 
amination of  the  earlier  decision  in 
the  same  case  (188  Mass.  315,  317, 
321,  74  N.  E.  653,  108  Am.  St.  Rep. 
479),  there  relied  on,  shows  that 
title  to  the  property  had  been  ac- 
quired by  the  promoters  before  the 
corporation  was  organized.  Hut- 
chinson  v.  Simpson,  92  N.  Y.  App. 
Div.  382,  87  Supp.  369,  contains 
nothing  to  the  contrary.  The  de- 
cision in  that  case  rested  upon  the 
ground  that  the  promoters  had  made 
a  complete  disclosure  of  their  posi- 
tion. See,  however,  Richardson  v. 
Graham,  45  W.  Va.  134,  30  S.  E.  92, 
also  Mississippi  Lumber  Co.  v.  Joice, 
176  111.  App.  110,  118. 

63.  See  Woodbury  Heights  Land 
Co.  v.  Loudenslager,  55  N.  J.  Eq.  78, 
88,  35  Atl.  436,  affirmed,  56  N.  J.  Eq. 
411,  41  Atl.  1115,  but  modified,  58  N. 
J.  Eq.  556,  43  Atl.  671. 


SECRET  PROFITS. 

corporation  purchased  and  paid  the  promoter,  not  for  the  prop- 
erty, but  for  his  option  thereon,  the  option  might  be  considered 
property  which  the  promoter  had  a  right  to  sell  to  the  corporation 
regardless  of  its  cost  to  him.64 

§  105.  Property  acquired  by  gift. 

In  Yale  Gas  Stove  Co.  v.  Wilcox,65  one  Foley,  being  the  owner 
of  certain  patents  which  he  desired  to  dispose  of,  offered  to  sell 
them  to  the  defendant  Wilcox  for  the  sum  of  $2500.  Wilcox  pro- 
posed that  the  patents  be  sold  to  a  company  to  be  organized  for 
the  purpose  and  that  the  proceeds  of  the  sale  be  divided  between 
Foley  and  Wilcox.  An  agreement  was  thereupon  prepared  by 
which  Wilcox  agreed  to  organize  a  company  to  purchase  the 
patents  for  the  sum  of  $3,000  in  cash  and  $5,000  in  shares,  and 
Foley  agreed  with  Wilcox,  that,  upon  the  execution  of  the  cove- 
nants therein  described  Foley  should  assign  to  Wilcox  a  half  in- 
terest in  the  letters  patent  and  one-half  of  the  cash  and  shares 
to  be  received  from  the  corporation  in  payment  therefor.  The 
scheme  was  carried  out,  the  corporation  organized,  and  the  patents 
transferred,  without  disclosing  Wilcox's  interest.  The  court  held 
that  the  original  arrangement  between  Wilcox  and  Foley  did  not 
contemplate  the  acquisition  by  Wilcox  of  any  interest  in  the 
patents,  but  merely  the  organization  of  the  corporation,  the  sale 
to  it  of  the  patents,  and  a  division  of  the  proceeds  of  the  sale, 
and  that  the  written  contract  was  entered  into  only  for  the  pur- 
pose of  carrying  out  this  plan.  The  court  refused  to  treat  Wilcox 
as  having  become  the  owner  of  an  interest  in  the  patents  before  he 
entered  upon  the  promotion  of  the  corporation. 

If  the  promoter,  before  the  promotion  is  undertaken,  becomes 

\ 

64.  See  the  possible  suggestion  in      Richardson  v.   Graham,  45  W.  Va. 
Maxwell  v.  McWilliams,  145  111.   App.      134,  140,  30  S.  E.  92. 
155,    168-169 ;    Chambers    v.    Mitt-         65.  64  Conn.  101,  121-122,  29  Atl. 
nacht,  23  S.  D.  449,  122  N.  W.  434;      303,  25  L.  R.  A.  90,  42  Am.  St.  Rep. 

159,  47  Am.  &  Eng.  Corp.  Gas.  647. 


196  THE  LAW  OF  PROMOTERS. 

the  actual  owner  of  property  which  the  corporation  is  organized 
to  purchase,  it  is  obviously  immaterial  whether  he  acquires  such 
property  by  gift  or  purchase.  If  the  owner  of  property,  before 
the  promotion,  makes  a  bona  fide  gift  of  an  undivided  interest 
therein  to  the  person  who  subsequently  promotes  the  corporation, 
the  validity  of  the  gift  must  be  recognized  and  the  promoter 
treated  as  the  actual  owner  of  the  undivided  interest.66  Where, 
however,  the  gift  is  made  only  upon  condition  of  the  organization 
of  the  corporation  and  the  purchase  of  the  property  by  it,  the 
transaction  is  a  mere  cloak  for  the  payment  of  a  secret  profit,  and 
the  courts,  looking  through  the  color  of  the  transaction,  refuse  to 
consider  the  promoter  as  having  acquired  an  interest  in  the  prop- 
erty before  he  undertook  the  promotion  of  the  company.67 

§  106.  Promoter's  rights  under  contract  afterward  modified. 

In  Plaquemines  Tropical  Fruit  Co.  v.  Buck,68  the  defendant 
Buck,  having  procured  from  one  White  a  contract  for  the  pur- 
chase of  certain  lands  in  Louisiana,  proceeded  to  organize  a  cor- 
poration to  take  over  the  lands.  White  refused  to  carry  out  his 
contract  and  Buck  commenced  suit  for  specific  performance.  The 
suit  was  compromised  by  an  agreement  under  which  the  original 
contract  was  amended  to  cover  additional  lands,  to  increase  the 
purchase  price  from  $25,000  to  $27,000,  and  to  reserve  to  White 
the  right  to  cut  willows  for  one  year.  The  court  was  of  the  opin- 
ion that  Buck  had  originally  purchased  the  property  for  the  cor- 
poration, but  held  that,  assuming  the  contrary,  the  modifications 
of  the  original  contract  constituted  a  new  contract ;  that  this  was 
entered  into  by  Buck  as  agent  of  the  company  and  that  he  could 

66.  Highway   Advertising    Co.    v.      don,  10  H.  L.  Gas.  26,  51-53,  11  Eng. 
Ellis,   7   Ont.  L.   R.   504,  511.     See      Rep.  934. 

post,  §  115.  Of.  Warren-Ehret  Co.  v.  Franklin- 

67.  Yale  Gas  Stove  Co.  v.  Wilcox,      ville  Ice  Mfg.  Co.,  198  Pa.  412,  48 
64  Conn.  101,  29  Atl.  303,  25  L.  R.  A.      Atl.  1119. 

90,  42  Am.  St.  R.  159,  47  Am.  &  Eng.  68.  52  N.  J.  Eq.  219,  239,  27  Atl. 
Corp.  Gas.  647 ;  Eland's  Case,  1893,  2  1094,  44  Am.  &  Eng.  Corp.  Gas.  686. 
Ch.  D.  612 ;  Tyrrell  v.  Bank  of  Lon- 


SECRET  PROFITS.  197 

not  take  any  profit  upon  the  sale  to  the  corporation.  The  decision 
was  correct  upon  the  particular  facts.  The  corporation  had, 
before  the  modified  contract  between  Buck  and  White  was  entered 
into,  already  agreed  to  purchase  the  property.  The  contract  was 
modified,  not  only  as  to  the  lands  to  be  conveyed  and  the  price  to 
be  paid  therefor,  but  also  by  inserting  the  reservation  of  the  right 
to  cut  willows.  There  was  no  evidence  as  to  the  value  of  this  right, 
but  it  unquestionably  placed  an  additional  burden  upon  the  land. 
When  Buck  consented  to  a  modification  of  the  original  contract 
which  rendered  it  impossible  for  him  to  sell  the  property  to  the 
corporation  upon  the  terms  previously  agreed  upon,  he  acted  as 
agent  for  the  corporation  and  was  unquestionably  bound  to  look 
solely  to  its  interests,  and  he  could  not  make  the  modified  contract 
for  his  own  account  and  sell  the  property  to  the  corporation  at  an 
advance. 

It  seems  clear  on  principle  that  a  promoter  who  had,  before  he 
entered  upon  the  fiduciary  relation,  made  a  contract  for  the  pur- 
chase of  the  property  which  he  has  agreed  to  sell  to  the  corpora- 
tion, may  modify  his  contract  for  the  purchase  of  the  property 
without  thereby  in  any  way  affecting  his  rights  as  against  the 
corporation,  provided  that  he  can  and  does  carry  out  his  contract 
with  the  corporation  in  exact  accordance  with  its  terms. 

§  107.  Expired  options. 

It  was  held  in  Gillett  v.  Dodge  69  that  the  promoter  might,  after 
an  option  held  by  the  company  had  expired,  purchase  for  himself 
the  property  covered  thereby  and,  having  done  so,  could  not  be 
compelled  to  convey  it  to  the  corporation.  The  transaction  under 
consideration  was  in  all  respects  fair  and  above  board,  and  the 
decision  undoubtedly  correct.  A  different  question  would  have 
arisen  had  the  promoter,  after  acquiring  the  property,  sold  it  to 
the  corporation  upon  terms  that  would,  unknown  to  his  associates, 
have  yielded  him  a  profit.  The  court  would  in  such  case  un- 

69.  50  Or.  552,  89  Pac.  741. 


198 


THE  LAW  OF  PROMOTERS. 


doubtedly  have  held  that  he  acquired  the  property  after  he  had 
entered  upon  the  relation  of  promoter  to  the  corporation,  and, 
unless  the  promotion  had,  when  he  made  his  purchase,  been  for 
the  time  being  completely  abandoned,  have  compelled  him  to  ac- 
count to  the  corporation  for  any  profits  made  on  the  resale. 

§  108.  Promoter  who  acquired  property  before  the  commence- 
ment of  relation  sometimes  treated  as  though  he  had 
acquired  it  thereafter. 

Although  the  promoter  makes  a  contract  to  purchase,  or  even 
pays  for  the  property  sold  to  the  corporation,  before  he  enters 
upon  the  relation  of  promoter  to  the  corporation,  he  will  be  sub- 
jected to  the  same  liabilities  as  though  he  had  made  the  purchase 
after  he  assumed  that  relation,  if  he  represents  that  he  acted  for 
the  corporation  in  making  the  purchase,  or  that  he  is  turning  in 
the  property  at  its  cost  to  him,  or  if  concealing  his  interest  he  leads 
the  company  to  believe  that  it  is  purchasing  the  property  from  his 
vendor.70 


70.  California. — Burbank  v.  Den- 
nis, 101  Cal.  90,  35  Pac.  444. 

Illinois. — Lyon  v.  Worcester,  49 
111.  App.  639. 

Missouri. — Wiano  Land  &  Im- 
provement Co.  v.  Webster,  75  Mo. 
App.  457. 

New  Jersey'. — Plaquemines  Tropi- 
cal Fruit  Co.  v.  Buck,  52  N.  J.  Eq. 
219,  235-237,  27  Atl.  1094,  44  Am.  & 
Eng.  Corp.  Gas.  686. 

New  York.— Getty  v.  Devlin,  54  N. 
Y.  403,  70  N.  Y.  504. 

Ohio. — Second  Nat'l  Bank  v. 
Greenville  S.  P.  S.  F.  P.  Co.,  23 
Ohio  C.  C.  274,  280. 

Pennsylvania. — Simons  v.   Vulcan 


Oil  &  Min.  Co.,  61  Pa.  202,  100  Am. 
Dec.  628. 

Wisconsin. — Pittsburg  Min.  Co.  v. 
Spooner,  74  Wis.  307,  42  N.  W.  259, 
17  Am.  St.  Rep.  149,  24  Am.  &  Eng. 
Corp.  Cas.  1. 

United  Kingdom  and  Colonies.' — 
Foss  v.  Harbottle,  2  Hare  461,  489 ; 
Alexandra  Oil  &  Dev.  Co.  v.  Cook, 
11  Ont.  W.  R.  1054. 

And  see  post,  §§  162,  264. 

If  the  purchase  of  the  promoter 
is  made  on  behalf  of  the  corporation 
to  be  promoted,  the  latter  is  entitled 
to  the  full  benefit  thereof.  See  ante, 
§  16.  « 


CHAPTER  VH. 

OF  LAWFUL  PROMOTER'S  PROFITS. 

Section  109.  Introductory. 

110.  Disclosure  to  directors. 

111.  Disclosure  to  subscribers. 

112.  Nature  of  the  disclosure. — Constructive  notice. 

113.  Waiver  of  disclosure. 

114.  Facts  that  must  be  disclosed. 

115.  Necessity  of  disclosing  price  paid  by  promoter. 

116.  The  same  subject. — Effect  of  independent  board  of  directors. 

117.  Misrepresentations  as  to  cost  of  property. 

118.  Ratification  of  promoter's  profits. 

119.  Ratification  by  majority  stockholders,  or  by  directors. 

120.  Profits  where  promoters  themselves  the  sole  subscribers, 

121.  The  same  subject. — Basis  of  the  rule. 

122.  The  same  subject. — Dummy  stockholders. 

123.  The    same    subject. — Effect    of    promoters'    contract    to    sell 
shares. 

124.  Legality  of  promoters'  profits  where  shares  subsequently  sold 
by  subscription. 

125.  Effect    of    subsequent    issue    not   contemplated    at    time   of 
original  transaction. 

126.  Effect  of  unsuccessful  attempt  to  sell  shares. 

127.  Effect  of  subsequent  sale  of  shares  donated  to  the  treasury 
by  promoters. 

128.  The  Old  Dominion  Copper  Company  litigations. 

129.  The  same  subject. — Subsequent  decisions. 

130.  The  same  subject. — Discussion. 
i 

§  109.  Introductory. 

Promoters'  profits  are  not  in  themselves  unlawful.     It  is  not 

the  taking  of  a  profit,  but  the  secrecy,  that  is  the  gist  of  the. 

(199) 


200  THE  LAW  OF  PROMOTERS. 

wrong.  Promoters'  profits,  in  whatever  amount,  are  quite  proper 
if  fairly  disclosed.1 

The  Supreme  Court  of  Massachusetts  recently  laid  down  four 
methods  by  which  a  promoter  might,  notwithstanding  his  fiduci- 
ary relation,  render  lawful  and  binding  his  personal  transactions 
with  the  corporation.  These  methods  the  court  stated  as  fol- 
lows: "  (a)  He  (the  promoter)  may  provide  an  independent 
board  of  officers  in  no  respect  directly  or  indirectly  under  his 
control,  and  make  full  disclosure  to  the  corporation  through 
them;  (6)  He  may  make  a  full  disclosure  of  all  material  facts  to 
each  original  subscriber  of  shares  in  the  corporation;  (c)  He 
may  procure  a  ratification  of  the  contract,  after  disclosing  its 
circumstances  by  vote  of  the  stockholders  of  the  completely  es- 
tablished corporation;  (d)  He  may  be  himself  the  real  subscriber 
of  all  of  the  shares  of  the  capital  stock  contemplated  as  a  part 
of  the  promotion  scheme."  2 

The  Supreme  Court  of  the  United  States,  in  another  litigation 
arising  out  of  the  same  transaction,  extended  the  fourth  method 
stated  by  the  Supreme  Court  of  Massachusetts,  to  all  cases  where 

1.  Federal.— Yeiser     v.    U.     S.  Co.,  52  Or.  70,  78-79,  96  Pac.  528, 

Board  &  Paper  Co.,  107  Fed.  Rep.  531-532. 

340,  344,  46  C.  C.  A.  567,  52  L.  R.  A.          Wisconsin.— Spaulding    v.    North 

724.  Milwaukee  Town  Site  Co.,  106  Wis. 

Connecticut. — Yale  Gas  Stove  Co.  481,  81  N.  W.  1064. 
v.  Wilcox,  64  Conn.  101,  122,  29  Atl.          Wyoming. — Edwards  v.  Johnston, 

303,  25  L.  R.  A.  90,  42  Am.  St.  Rep.  —  Wyo.  — ,  152  Pac.  273. 
159,  47  Am.  &  Eng.  Corp.  Gas.  647.  United  Kingdom  and  Colonies. — 

Massachusetts. — O  1  d       Dominion  In  re  Olympia,  Ltd.,  1898,  2  Ch.  Div. 

Copper,    etc.,    Co.    v.    Bigelow,    188  153,  174,  affirmed,  sub  nom.  Gluck- 

Mass.  315,  322,  74  N.  E.  653,  108  Am.  stein  v.  Barnes,  1900,  App.  Cas.  240 ; 

St.  Rep.  479.  Lagunas    Nitrate    Co.    v.    Lagunas 

New  Jersey. — Arnold   v.   Searing,  Syndicate,  1899,  2  Ch.  Div.  392,  425, 

78  N.  J.  Eq.  146,  158,  78  AtL  762,  426. 

767;  Bigelow  v.  Old  Dominion  Cop-         2.  Old  Dominion  Copper,  etc.,  Co. 

per,  etc.,  Co.,  74  N.  J.  Eq.  457,  502,  v.   Bigelow,  203  Mass.   159,  178,  89 

71  Atl.  153.  N.  E.  193,  40  L.  R,  A.  N.  S.  314. 

Oregon. — Wills   v.   Nehalem  Coal 


LAWFUL  PROFITS. 


201 


the  promoter  is  himself,  at  the  time  of  the  transaction  in  question, 
the  sole  subscriber  for  the  shares  of  the  corporation,  and  held  that 
disclosure  need  not  be  made  to  those  who  are  thereafter,  though  as 
a  part  of  the  original  scheme,  brought  in  as  subscribers  for  the 
company's  shares.3  The  courts  were  in  these  cases  considering  the 
question  of  the  legality  of  a  promoter's  sale  of  his  own  property 
to  the  corporation,  but  the  rules  stated  apply  with  like  effect  to 
any  profit  taken  by  a  promoter. 

All  of  these  methods  rest  in  their  final  analysis  upon  the  same 
basis, — that  of  disclosure  and  acquiescence.4  The  burden  of  sus- 
taining the  legality  of  the  transaction  rests  in  each  case  upon  the 
promoter,  and  he  must  make  certain,  not  only  that  one  of  the 
methods  mentioned  is  strictly  followed,  but  also  that  a  proper 
record  thereof  is  made,  so  that  proof  may  not  be  lacking  in  case 
he  should  ever  be  called  to  account.5 


3.  Old  Dominion  Copper,  etc.,  Co. 
v.  Lewisohn,  210  U.  S.  206,  212-217, 
28  Sup.  Ct.  634,  52  L.  Ed.  1025.    For 
a    full    discussion    of   the   Old    Do- 
minion Copper  Co.   litigations,   see 
post,  §§  128-130. 

4.  See  post,  §  121. 

5.  Arizona. — Hughes     v.     Cadena 
DeCobre  Min.  Co.,  13  Ariz.  52,  63, 
108  Pac.  231,  235. 

Massachusetts. — Parker  v.  Nicker- 
son,  112  Mass.  195,  197-198. 

New  Jersey. — Bigelow  v.  Old  Do- 
minion Copper,  etc.,  Co.,  74  N.  J.  Eq. 
457,  502,  71  Atl.  153. 

New  York. — Colton  Improvement 
Co.  v.  Richter,  26  Misc.  26,  30,  55 
Supp.  486 ;  Sage  v.  Culver,  147  N.  Y. 
241,  247,  41  N.  E.  513;  Smith  v. 
Ogilvie,  127  N.  Y.  143,  148,  27  N.  E. 
807 ;  Cf .  Heckscher  v.  Edenborn,  131 
App.  Div.  253,  258,  260,  115  Supp. 
673,  followed,  137  App.  Div.  899,  122 


Supp.  1131,  reversed,  203  N.  Y.  210, 
96  N.  E.  441. 

United  Kingdom  and  Colonies. — 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
1230,  1277,  6  Eng.  Rul.  Cas.  777,  39 
L.  T.  N.  S.  269,  27  W.  R.  65 ;  Dunne 
v.  English,  L.  R.  18  Eq.  524;  In  re 
Darby,  1911,  1KB.  95,  103,  80  L.  J. 
K.  B.  Div.  180. 

It  is  said  in  Bentinck  v.  Fenn  (L. 
R.  12  App.  Cas.  652,  661,  see  also 
666  and  670,  see  also  Archer's  Case, 
1892,  1  Ch.  Div.  322,  341-342),  that 
there  is  a  distinction  between  an  ac- 
tion for  the  rescission  of  the  pro- 
moter's sale  to  the  corporation,  and 
an  action  under  the  165th  section  of 
the  Companies  Act  of  1862  based 
upon  the  misfeasance  of  a  director. 
In  the  first  case  the  burden  of 
proof  is  upon  the  fiduciary,  in  the 
second,  upon  the  complainant.  Sec- 


202 


THE  LAW  OF  PROMOTERS. 


§  110.  Disclosure  to  directors. 

The  promoter  may  lawfully  sell  his  own  property  to  the  corpora- 
tion he  is  promoting,  if  he  provides  it  with  a  competent  board  of 
directors  wholly  free  from  his  control  or  influence,  and  makes  to 
such  board  of  directors  a  full  disclosure  of  his  interest  in  the 
property,  leaving  it  to  the  board  to  determine  whether  the  pur- 
chase shall  be  made.6 

A  disclosure  to  the  directors  is  ineffectual  if  the  promoters  are 


tion  165  of  the  Companies  Act  of 
1862  provided  that  "  where,  in  the 
course  of  the  winding  up  of  any 
Company  under  this  Act,  it  appears 
that  any  past  or  present  Director, 
Manager,  Official  or  other  Liquida- 
tor or  any  Officer  of  such  Company, 
has  misapplied  or  retained  in  his 
own  hands  or  become  liable  or  ac- 
countable for  any  monies  of  the 
Company,  or  been  guilty  of  any  mis- 
feasance or  breach  of  trust  in  re- 
lation to  the  Company,  the  Court 
may  *  *  *  examine  into  the  conduct 
of  such  Director,  Manager  or  other 
Officer,  and  compel  him  to  repay  any 
monies  so  misapplied  or  retained,  or 
for  which  he  has  become  liable  or 
accountable  *  *  *  " 

6.  Connecticut. — Yale  Gas  Stove 
Co.  v.  Wilcox,  64  Conn.  101,  120,  29 
Atl.  303,  25  L.  R.  A.  90,  42  Am.  St. 
Rep.  159,  47  Am.  &  Eng.  Corp.  Gas. 
647. 

Indiana. — Parker  v.  Boyle,  178 
Ind.  560,  99  N.  E.  986. 

Iowa. — Caffee  v.  Berkley,  141 
Iowa  344,  118  N.  W.  267. 

New  Jersey. — Bigelow  v.  Old  Do- 
minion Copper,  etc.,  Co.,  74  N.  J.  Eq. 
457,  502,  505-506,  71  Atl.  153;  Pla- 
quemines  Tropical  Fruit  Co.  v. 


Buck,  52  N.  J.  Eq.  219,  230,  27  Atl. 
1094,  44  Am.  &  Eng.  Corp.  Gas.  686 ; 
Woodbury  Heights  Land  Co.  v. 
Loudenslager,  55  N.  J.  Eq.  78,  91,. 
35  Atl.  436,  (affirmed,  56  N.  J.  Eq. 
411,  41  Atl.  1115,  but  modified  on  an- 
other point  on  reargument,  58  N.  J. 
Eq.  556,  43  Atl.  671)  ;  See  v.  Hep- 
penheimer,  69  N.  J.  Eq.  36,  72,  61 
Atl.  843. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  78-79,  96  Pac.  528, 
531-532. 

United  Kingdom  and  Colonies. — 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Gas.  1218, 
1236,  (see  also  pp.  1229  and  1260),  6 
Eng.  Rul.  Gas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65 ;  Bentinck  v.  Fenn, 
L.  R.  12  App.  Gas.  652,  670-671 ;  In 
re  Olympia,  Ltd.,  1898,  2  Ch.  Div. 
153,  167,  173,  affirmed,  sub  nom. 
Gluckstein  v.  Barnes,  1900  App.  Cas. 
240. 

See  note  to  Lomita  Land  &  Water 
Co.  v.  Robinson,  18  L.  R.  A.  N.  S. 
1108-1109. 

As  to  the  liability  of  the  directors 
for  negligence  or  fraud,  see  In  re 
Brazilian  Rubber  Plantations  and 
Estates,  Ltd.,  1911,  1  Ch.  Div.  425. 


LAWFUL  PROFITS. 


203 


themselves  the  directors,7  or  if,  the  promoter  being  a  corporation, 
the  directors  of  the  promoting  company  are  also  the  directors  of 
the  company  promoted.8  The  disclosure  is  of  no  avail  if  the  di- 
rectors are  in  any  manner  dominated  by  the  promoter,  or  under 
his  control,9  if  the  directors  are  qualified  by  shares  belonging  to  the 
promoter,10  or  receive  their  qualifying  shares  as  a  gift  from  the 
promoter,11  or  if  they  purchase  their  qualifying  shares  under  an 
agreement  of  the  promoter  to  indemnify  them  against  loss 
thereon.12  The  disclosure  is  likewise  ineffectual  if  the  promoter 
has  promised  the  directors  a  bonus  in  the  shares  of  the  new  com- 


7.  Old  Dominion  Copper,  etc.,  Co. 
v.  Bigelow,  203  Mass.  159,  188-189, 
89  N.  E.  193,  40  L.  R.  A.  N.  S.  314 ; 
Arnold  v.  Searing,  78  N.  J.  Eq.  146, 
158,  78  Atl.  762,  767;  Gluckstein  v. 
Barnes,    1900,    App.    Gas.    240,   247, 
249,  259,  affirming,  In  re  Olympia, 
Ltd.,  1898,  2  Ch.  Div.  153,  167-168, 
173.  In  re  British   Seamless  Paper 
Box  Co.,  L.  R.  17  Ch.  Div.  467,  471 ; 
In  re  Leeds  &  Hanley  Theatres  of 
Varieties,  1902,  2  Ch.  Div.  809,  824 ; 
Alexandra  Oil  &  Dev.  Co.  v.  Cook, 
11  Ont.  W.  R.  1054,  1060;   Bennett 
v.  Havelock  E.  L.  &  P.  Co.,  16  Ont. 
Week.  Rep.  19. 

8.  See    In    re    Leeds    &    Hanley 
Theatres  of  Varieties,  1902,  2  Ch. 
Div.  809,  831. 

9.  Bigelow  v.  Old  Dominion  Cop- 
per, etc.,  Co.,  74  N.  J.  Eq.  457,  501- 
502,   505-506,    71    Atl. '  153 ;    See    v. 
Heppenheimer,  69  N.  J.  Eq.  36,  72, 
75-76,  61  Atl.  843;  Arnold  v.  Sear- 
ing, 78  N.  J.   Eq.  146,  159,   78  Atl. 
762,  767;  Rice's  Appeal,  79  Pa.  168, 
198;   Pietsch  v.  Milbrath,  123  Wis. 
647,   657,   101   N.   W.   388,   392,   102 
N.  W.  342,  68  L.  R.  A.  945,  107  Am. 


St.  Rep.  1017. 

Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
1256-1257,  6  Eng.  Rul.  Cas.  777,  39 
L.  T.  N.  S.  269,  27  W.  R.  65;  In  re 
Leeds  &  Hanley  Theatres  of  Varie- 
ties, 1902,  2  Ch.  Div.  809,  823-824, 
831 ;  Stratford  Fuel  Ice  C.  &  C.  Co. 
v.  Mooney,  21  Ont.  L.  R.  426. 

10.  Erlanger    v.    New    Sombrero 
Phosphate   Co.,   L.   R.   3   App.   Cas. 
1218,  1228,  1246,  1256,  1260,  6  Eng. 
Rul.  Cas.  777,  39  L.  T.  N.  S.  269,  27 
W.   R.  65;  In  re  Leeds  &  Hanley 
Theatres  of  Varieties,   1902,  2  Ch. 
Div.  809,  823. 

11.  See   In   re  Leeds   &   Hanley 
Theatres  of  Varieties,   1902,   2  Ch. 
Div.  809;  Twycross  v.  Grant,  L.  R. 
2  C.  P.  D.  469,  493,  et  seq.;  Erlanger 
v.  New  Sombrero  Phosphate  Co.,  L. 
R.  3  App.  Cas.  1218,  1228,  1256,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,   27   W.    R.    65.      See   Derry   v. 
Peek,  L.  R.  14  App.  Cas.  337,  345- 
346. 

12.  Archer's    Case,    1892,    1    Ch. 
Div.  322,  341.    See  ante,  §  94. 


204  THE  LAW  OF  PROMOTERS. 

pany,13  or  has  given  or  promised  them  any  inducement  beyond 
their  prescribed  directors'  fees.14 

It  should  be  noted  that  the  statutes  of  the  various  states  pro- 
viding that  stock  may  be  paid  for  in  property  and  that  the  judg- 
ment of  the  directors  as  to  the  value  of  such  property  shall  be  con- 
clusive in  the  absence  of  fraud,  have  no  application  to  the  ques- 
tion of  the  legality  of  the  promoter's  profits.15 

The  fact  that  one  of  the  directors  is  himself  the  owner  of,  or 
to  some  extent  interested  in,  the  property  to  be  sold  to  the  corpo- 
ration, renders  the  sale  voidable  at  the  election  of*the  company, 
if  the  interested  director  assumes  to  act  for  the  corporation,  or  if 
his  presence  is  necessary  to  constitute  a  quorum  at  the  meeting 
at  which  the  resolution  to  purchase  is  adopted,16  or  if  his  interest 
is  concealed  from  his  fellow  directors.17 

Whether  the  sale  is  voidable  if  the  director  discloses  his  interest 
and  refrains  from  acting  in  the  transaction  or  in  any  way  influenc- 
ing his  fellow  directors,  is  a  question  upon  which  the  authorities 
are  not  in  accord.  Some  authorities  hold  that  the  transaction  is 
valid  if  the  presence  of  the  interested  director  is  not  neccessary 
to  form  a  quorum**  his  vote  is  not  needed  to  pass  the  resolution, 
and  his  fellow  directors  with  entire  independence  and  with  full 

13.  Plaquemines    Tropical     Fruit      Ohio  C.  C.  198,  213-214,  which  was  a 
Co.  v.  Buck,  52  N.  J.  Eq.  219,  240,      case  of  actual  fraud. 

27  Atl.  1094,  44  Am.  &  Eng.  Corp.  17.  Spaulding   v.    North   Milwau- 

Cas.  686.  kee  Town   Site  Co.,   106   Wis.   481, 

14.  See   McKay's   Case,    L.    R.    2  493,  81  N.  W.  1064,  1068;  Bentinck 
Ch.  Div.  1,  5;  Emma  Silver  Mining  v.    Fenn,   L.    R.   12   App.   Cas.   652, 
Co.  v.  Grant,  L.  R.  11  Ch.  Div.  918.  658,  661,  670,  671,  affirming,  In  re 

15.  Mason  v.  Carrothers,  105  Me.  Cape  Breton  Co.,   L.   R.  29  Ch.   D. 
392,    403-404,    74    Atl.    1030,    1035.  795,  aff'g,  L.  R.  26  Ch.  Div.  221. 
But  see  post,  §  118,  note.     See  also  18.  The  vote  of  the  directors  is  a 
§§  100,  165,  270.  nullity    if   there   are    not   sufficient 

16.  Plaquemines    Tropical    Fruit  disinterested    directors    to    form    a 
Co.  v.  Buck,  52  N.  J.  Eq.  219,  238,  quorum.     Federal   Life   Ins.   Co.   v. 
27  Atl.  1094,  44  Am.  &  Eng.  Corp.  Griffin,  173  111.  App.  5,  18.    And  see 
Cas.  686.     See  Shawnee  Commercial  cases  cited  in  following  note. 

&   Savings   Bank  Co.   v.   Miller,   24 


LAWFUL  PROFITS. 


205 


knowledge  of  the  facts,  pass  upon  the  question  of  the  purchase.19 
Other  authorities  hold  that  the  law  will  not  attempt  to  measure 
the  influence  of  a  director  with  his  associates ;  that  the  value  of 
the  rule  declaring  voidable  transactions  in  which  any  director  has 
an  individual  interest,  lies  in  its  rigidity ;  and  that  the  sale  to  the 
corporation  is  voidable  at  its  election,  unless  ratified  by  the  stock- 
holders, if  a  single  director  has  a  personal  interest,  even  though 
he  absents  himself  from  the  meeting,  and  scrupulously  abstains 
from  influencing  his  fellows.20 


19.  Porter  v.  Lassen  County 
Land  &  Cattle  Co.,  127  Cal.  261,  59 
Pac.  563;  Griffith  v.  Blackwater 
Boom  &  Lumber  Co.,  55  W.  Va. 
604,  48  S.  E.  442,  69  L.  R.  A.  124, 
(citing  Clark  &  Marshall  on  Cor- 
porations, §  761c,  and  10  Cyc.  of 
Law  &  Proc.,  794,  795)  ;  Erlanger 
v.  New  Sombrero  Phosphate  Co.,  L. 
R.  3  App.  Cas.  1218,  1233,  1262, 
1280,  6  Eng.  Rul.  Cas.  777,  39  L.  T. 
N.  S.  269,  27  W.  R.  65,  affirming, 
New  Sombrero  Phosphate  Co.  v. 
Erlanger,  L.  R.  5  Ch.  Div.  73,  112- 
113,  25  W.  R.  436 ;  Bentinck  v.  Fenn, 
L.  R.  12  App.  Cas.  652,  658,  661,  671. 

Cook  on  Corporations  (7th  ed.),  § 
652. 

See  note  to  Pittsburg  Min.  Co.  v. 
Spooner,  42  N.  W.  259,  265. 

Some  cases,  without  discussing 
the  other  limitations  referred  to  In 
the  text,  state  that  a  director  may 
sell  his  property  to  the  corporation 
if  he  discloses  all  the  facts  and  the 
transaction  is  free  from  fraud  or 
collusion.  Stewart  v.  St.  Louis  F. 
S.  &  W.  R.  Co.,  41  Fed.  Rep.  736, 
738;  Babcock  v.  Farwell,  146  111. 
App.  307,  344,  (aff'd,  245  111.  14,  91 
N.  E.  683,  137  Am.  St.  Rep.  284, 


19  Am.  &  Eng.  Ann.  Cas.  74)  ;  St. 
Louis  F.  S.  &  W.  R.  Co.  v.  Tier- 
nan,  37  Kan.  606,  632,  15  Pac.  544, 
559. 

20.  U.  S.  Steel  Corporation  v. 
Hodge,  64  N.  J.  Eq.  807,  813,  54 
Atl.  1,  60  L.  R.  A.  742,  and  cases 
cited ;  Tooker  v.  National  Sugar  Re- 
fining Co.,  80  N.  J.  Eq.  305,  313,  84 
Atl.  10;  Stewart  v.  Lehigh  Valley 
R.  R.  Co.,  38  N.  J.  Law,  505,  523, 
and  cases  cited,  holding  that  it  is  a 
breach  of  the  director's  duty  to  the 
stockholders,  for  him  to  abstain 
from  acting  as  a  director  in  the 
transaction.  Munson  v.  Syracuse 
G.  &  C.  R.  R.  Co.,  103  N.  Y.  58, 
73-75,  8  N.  E.  355,  29  Am.  &  Eng. 
R.  R.  Cas.  377,  and  cases  cited ; 
Cumberland  Coal  Co.  v.  Sherman, 
30  Barb.  (N.  Y.)  553,  572-573;  Col- 
ton  Improvement  Co.  v.  Richter,  26 
N.  Y.  Misc.  26,  31,  55  Supp.  486; 
Metropolitan  El.  R.  R.  Co.  v. 
Manhattan  R.  R.  Co.,  11  Daly 
(N.  Y.)  373,  517,  14  Abb.  N.  C.  103, 
287,  et  seq.;  Aberdeen  Ry.  Co.  v. 
Blakie,  1  Macq.  461,  471,  473,  2 
Eq.  1281;  Scottish  Pac.  Coast  Min. 
Co.,  Ltd.,  v.  Falkner,  Bell  &  Co., 
Sess.  Cas.,  15  Rettie  290,  305-306. 


206  THE  LAW  OF  PROMOTERS. 

It  is  held  in  Scottish  Pacific  Coast  Mining  Co.,  Ltd.,  v.  Falkner, 
Bell  &  Co.,21  that  if  the  promoter  is  himself  a  director,  the  fact 
that  a  committee  of  directors  of  which  he  is  not  a  member  is  ap- 
pointed to  determine  whether  the  company  shall  be  organized  and 
the  transaction  consummated  does  not,  though  the  facts  are  fully 
disclosed  to  the  committee,  alter  the  situation  or  legalize  a  com- 
mision  paid  to  the  promoter. 

Though  the  transaction  in  which  the  promoter  is  interested  be 
acted  upon  by  a  board  of  directors  free  from  his  control  or  influ- 
ence, the  transaction  is  not  binding  on  the  corporation  if  the 
interest  of  the  promoter  and  all  the  facts  bearing  theron,  are  not 
fully  disclosed  to  such  board,22  or  if  any  misstatement  in  relation 
thereto  is  made  to  the  subscribers  for  the  company's  shares.23 

A  question  may  well  arise  as  to  whether  the  consent  of  an  inde- 
pendent board  of  directors,  though  given  with  knowledge  of  all  the 
facts,  would  in  every  case  be  effectual  to  render  the  promoter's 
profits  lawful.  The  directors  are  bound  to  act,  and  have  power 
to  act,  only  in  the  interest  of  the  corporation,  and  not  against  it.24 
If  a  promoter,  being  the  owner  of  the  property  which  the  corpo- 
ration is  organized  to  acquire,  discloses  all  the  facts  to,  and  deals 
at  arms'  length  with,  an  independent  board  of  directors,  such 

See  note  to  Pittsburg  Min.  Co.  v.  phate  Co.,  L.  R.  3  App.  Cas.  1218, 

Spooner,  42  N.  W.  259,  262.  1229,  1236,  6  Eng.  Rul.  Cas.  777,  39 

See  also  21  Am.  &  Eng.  Ency.  of  L.  T.  N.  S.  269,  27  W.  R.  65;  La- 
Law,  2nd.  ed.,  898.  gunas  Nitrate  Co.  v.  Lagunas  Syndi- 

21.  Sess.  Cas.,  15  Rettie  290,  305-  cate,  1899,  2  Ch.  Div.  392,  445-446 ; 
306.  Alexandra  Oil  &  Dev.  Co.  v.  Cook, 

22.  Yale  Gas  Stove  Co.  v.  Wilcox,  11  Ont.  W.  R.  1054,  1060,  and  see 
64  Conn.   101,  120,  29  Atl.  303,   25  Stratford  Fuel  Ice  C.   &  C.  Co.   v. 
L.  R.  A.  90,  42  Am.   St.  Rep.   159,  Mooney,  21  Ont.  L.  R.  426. 

47    Am.    &    Eng.    Corp.    Cas.    647;  23.  Burbank  v.  Dennis,  101  Gal. 

South    Joplin    Land    Co.    v.    Case,  90,   101,  35   Pac.   444,  448;    Simons 

104  Mo.  572,  579,  16  S.  W.  390,  393,  v.  Vulcan  Oil  &  Mining  Co.,  61  Pa. 

38  Am.  &  Eng.  Corp.  Cas.  333 ;  Wills  202,  221,  100  Am.  Dec.  628. 

v.  Nehalem  Coal  Co.,  52  Or.  70,  76,  24.  Simons  v.  Vulcan  Oil  &  Min- 

96  Pac.  528,  531-532.  ing  Co.,   61   Pa.   202,  221,   100  Am. 

Erlanger  v.  New  Sombrero  Phos-  Dec.  628.     Cited  in  Pittsburg  Min- 


LAWFUL  PROFITS.  207 

board  of  directors  has  power  to  decide  whether  the  purchase  shall 
be  made,  and  its  action  is  binding  upon  the  corporation.  If,  how- 
ever, the  promoter  has  nothing  to  offer  or  withhold  from  the  cor- 
poration, if  the  property  on  the  resale  of  which  he  asks  a  profit 
was  acquired  by  him  under  such  circumstances  that  a  conveyance 
at  cost  might  be  compelled  by  the  corporation,  it  is  the  duty  of 
the  board  of  directors  to  insist  upon  such  conveyance,  and  the 
legal  effect  of  their  consent  to  pay  a  profit  to  the  promoter  is 
open  to  question.25  If  the  promoter  has  taken  a  commission  from 
the  vendor  under  circumstances  which  render  him  liable  to  ac- 
count therefor,  or  if  he  seeks  from  the  directors  payment  in  excess 
of  reasonable  compensation  for  his  services,  it  is  the  duty  of  the 
directors  to  insist  upon  the  rights  of  the  corporation,  and  the 
binding  effect  of  their  consent  to  the  retention  or  payment  of  the 
promoter's  profit  is  doubtful.26 

The  directors  may,  of  course,  compromise  a  debatable,  claim,  or 
even  make  reasonable  concessions  to  buy  peace  where  the  claim  is 
without  merit.  The  courts  will,  however,  be  quick  to  see  through 
any  cloak  for  the  payment  of  an  unlawful  promoter's  profit,  and 
if  necessary  set  aside  the  action  of  the  directors. 

The  legalization  of  promoters'  profits  by  means  of  a  disclosure 
to  an  independent  board  of  directors,  appears  upon  careful  con- 
sideration to  be  a  matter  of  theory  rather  than  of  practice.  The 
cases  must  indeed  be  rare  where  a  promoter,  having  acquired  prop- 
erty or  the  control  thereof,  is  willing  to  go  to  the  labor  and  ex- 
pense of  organizing  a  corporation  to  take  it  off  his  hands,  and 
then,  without  any  inquiry  as  to  their  views  in  the  matter,  to  select 
a  board  of  directors  quite  free  from  his  control  to  decide  upon  the 
advisability  of  consummating  the  transaction.  One  can  readily 

ing  Co.  v.  Spooner,  74  Wis.  307,  628,  and  see  post,  §  119,  as  to  when 
321,  42  N.  W.  259,  262,  17  Am.  St.  the  corporation  can  compel  a  con- 
Rep.  149,  24  Am.  &  Eng  Corp.  veyance  see  ante,  §  74.  See  post,  § 
Cas.  1.  161n. 

25.  Simons  v.  Vulcan  Oil  &  Min.  26.  See  post,   §  119. 
Co.,  61  Pa.  202,  221,  100  Am.  Dec. 


208 


THE  LAW  OF  PROMOTERS. 


conceive  of  a  promoter  who  organizes  a  corporation  to  take  over 
his  property,  disclosing  to  every  subscriber  the  exact  circum- 
stances of  the  transaction,  thus  enabling  each  subscriber  to  de- 
cide for  himself  whether  he  wishes  to  come  in;  but  the  situation 
would  be  somewhat  extraordinary  in  which  a  promoter,  having 
organized  the  corporation  and  obtained  the  necessary  subscribers 
to  its  shares,  would  be  willing  to  leave  the  consummation  of  his 
plan  to  the  judgment  of  a  board  of  directors  over  which  he  exer- 
cises no  control.  No  such  instance  seems  to  be  found  in  the  re- 
ported cases. 

§  111.  Disclosure  to  subscribers. 

A  sale  to  the  corporation  of  the  promoter's  property,  or  the 
retention  by  him  of  a  personal  profit  upon  the  promotion  in  what- 
ever manner  derived,  may  be  made  lawful  and  binding  upon  the 
corporation,  by  a  full  and  fair  disclosure  of  the  facts  to,  and  the 
acquiescence  of,  all  the  subscribers  for  the  company's  shares.27  An 


27.  California. — Garretson  v.  Pa- 
cific Crude  Oil  Co.,  146  Cal.  184,  79 
Pac.  838. 

Indiana. — Parker  v.  Boyle,  178 
Ind.  560,  99  N.  E.  986. 

Massachusetts. — Hayward  v.  Lee- 
son,  176  Mass.  310,  320,  57  N.  E. 
656,  49  L.  R.  A.  725;  Old  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  325,  74  N.  E.  653,  108 
Am.  St.  Rep.  479. 

Minnesota. — Selover  v.  Isle  Har- 
bor Land  Co.,  91  Minn.  451,  98  N.  W. 
344,  100  Minn.  253,  111  N.  W.  155; 
Advance  Realty  Co.  v.  Nichols,  126 
Minn.  267,  148  N.  W.  65. 

Montana. — Fitzpatrick  v.  O'Neill, 
43  Mont.  552,  118  Pac.  273,  Am.  & 
Eng.  Ann.  Cas.,  1912,  C.  296. 

New  Jersey. — Arnold  v.  Searing, 
73  N.  J.  Eq.  262,  265,  67  Atl.  831; 
Bigelow  v.  Old  Dominion  Copper, 


etc.,  Co.,  74  N.  J.  Eq.  457,  502,  506, 
71  Atl.  153. 

New  York. — Colton  Improvement 
Co.  v.  Richter,  26  Misc.  26,  31,  55 
Supp.  486. 

Pennsylvania. — Rice's  Appeal,  79 
Pa.  168,  198;  Short  v.  Stevenson,  63 
Pa.  95. 

Wisconsin. — Spaulding  v.  North 
Milwaukee  Town  Site  Co.,  106  Wis. 
481,  493,  81  N.  W.  1064,  1066. 

United  Kingdom  and  Colonies. — 
In  re  Innes  &  Co.,  Ltd.,  1903,  2  Ch. 
Div.  254,  260,  266;  Erlanger  v.  New 
Sombrero  Phosphate  Co.,  L.  R.  3 
App.  Cas.  1218,  1245,  1262,  1280,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65,  aff'g  New  Som- 
brero Phosphate  Co.  v.  Erlanger,  L. 
R.  5  Ch.  Div.  73,  113,  25  W.  R.  436; 
Lagunas  Nitrate  Co.  v.  Lagunas 
Syndicate,  1899,  2  Ch.  Div.  392,  409, 


LAWFUL  PROFITS. 


209 


independent  board  of  directors  is  in  such  case  unnecessary.28  A 
subscriber  in  possession  of  the  facts  may  decide  for  himself 
whether  or  not  he  wishes  to  come  into  the  company,  and  if  all  the 
subscribers,  with  full  knowledge,  decide  to  join  in  the  venture, 
their  unanimous  consent  binds  the  corporation.29 


426,  462,  (Rigby,  L.  J.,  dissenting.) 
Larocque  v.  Beauchemin,  1897  App. 
Cas.  358,  364. 

See  note  to  Lomita  Land  &  Water 
Co.  v.  Robinson,  18  L.  R.  A.  N.  S. 
1108-1109. 

The  burden  of  proving  the  dis- 
closure is  upon  the  promoters. 
Hughes  v.  Cadena  DeCobre  Min. 
Co.,  13  Ariz.  52,  63,  108  Pac.  231, 
235,  and  see  cases  cited,  ante,  § 
109n,  5. 

28.  See  Lagunas  Nitrate  Co.  v. 
Lagunas  Syndicate,  1899,  2  Ch.  392, 
425,  and  other  cases  cited  under 
note  27 ;  Larocque  v.  Beauchemin, 
1897,  App.  Cas.  358,  364. 

The  stockholders  cannot  make  a 
purchase  for  the  company.  Their 
action,  even  though  embodied  in  a 
formal  resolution,  is  advisory  only, 
and  does  not  dispense  with  the 
necessity  of  action  by  the  board  of 
directors,  (Plaquemines  Tropical 
Fruit  Co.  v.  Buck,  52  N.  J.  Eq.  219, 
238-239,  27  Atl.  1094,  44  Am.  &  Eng. 
Corp.  Cas.  686,  and  see  ante,  §  87. 
See  Cook  on  Corporations,  (7th  ed.), 
§  709;  Thompson  on  Corporations, 
(2nd  ed.),  §  1184),  but  does  ef- 
fectually avoid  any  objection  based 
upon  the  fact  that  the  directors 
were  not  disinterested. 

There  are  some  dicta  sounding  to 
the  contrary  of  the  rule  stated  In 
the  text,  in  Re  Hess  Mfg.  Co., 


(23  Can.  S.  C.  644,  658,  668),  but 
the  court  there  relies  on  Erlanger 
v.  New  Sombrero  Phosphate  Co.,  L. 
R.  3  App.  Cas.  1218,  6  Eng.  Rul.  Cas. 
777,  39  L.  T.  N.  S.  269,  27  W.  R.  65), 
in  which  case  it  is  distinctly  said 
that  the  disclosure  to  the  share- 
holders would  have  been  sufficient, 
had  the  fact  that  the  board  of  di- 
rectors was  not  independent  also 
been  disclosed.  (See  pp.  1262- 
1263).  The  statement  in  the  Hess 
Mfg.  Co.  case,  probably  means  that 
only  a  disclosure  to  an  independent 
board  of  directors  could  bind  future 
subscribers.  ( See  p.  668 ) .  For  this 
distinction,  see  post,  §  124,  et  seq, 
If  anything  more  is  intended,  the 
dictum  is  in  conflict  with  the  au- 
thorities cited  under  note  27.  It 
may  be  safely  assumed  that  noth- 
ing contrary  to  the  rule  stated  in 
the  text  was  intended  by  the  court 
in  See  v.  Heppenheimer,  69  N.  J. 
Eq.  36,  71-72,  61  Atl.  843. 

An  agreement  to  pay  the  pro- 
moters a  specified  compensation  for 
their  services,  though  fully  dis- 
closed to  the  subscribers,  is  not  en- 
forceable if  there  is  a  secret  agree- 
ment of  the  promoters  to  pay  a  part 
of  such  compensation  to  the  di- 
rectors. Ex  parte  Williams,  L.  R.  2 
Eq.  216. 

29.  See  post,  §§  120n,  121,  128 
note  33.  See  also  cases  cited  under 
note  27. 


210  THE  LAW  OF  PROMOTERS. 

If  the  promoter  relies,  for  the  legalization  of  his  profits,  upon 
a  disclosure  to  the  subscribers,  he  must  show  a  disclosure  to  all 

t 

of  the  subscribers  and  their  unanimous  consent.  The  majority 
stockholders  may,  after  the  corporation  has  been  fully  organized, 
bind  both  the  corporation  and  the  minority  stockholders  upon  all 
matters  within  the  scope  of  the  corporate  powers.  While,  how- 
ever, the  corporation  is  in  process  of  formation,  each  subscriber 
acts  for  and  can  bind  only  himself,  and  the  corporation  is  bound 
only  by  their  unanimous  consent.  It  has  frequently  been  said 
that  an  independent  board  of  directors  can  bind  the  company  and 
its  shareholders  in  regard  to  a  transaction  involving  the  promoter's 
individual  interest,30  but  the  directors  stand  in  a  fiduciary  rela- 
tion to  the  company  and  its  subscribers,  and  are  bound  to  act 
solely  in  the  interest  of  their  cestuis,  while  the  majority  stock- 
holders are  free  from  any  fiduciary  obligation  and  may  vote  their 
shares  as  they  see  fit,  provided  that  they  do  not  commit  any  fraud 
upon  the  minority.  To  permit  the  majority  of  the  subscribers  to 
control  the  corporation,  and  to  bind  the  minority,  in  relation  to 
a  transaction  involving  the  organization  of  the  company,  or  the 
purchase  of  the  property  which  it  is  organized  to  operate,  and 
upon  the  nature  of  which  transaction  the  desirability  of  becoming 
a  shareholder  must  very  largely  depend,  would  be  wholly  unreason- 
able and  open  the  door  to  all  manner  of  promoters'  frauds. 

Each  subscriber  must,  therefore,  if  the  acquiescence  of  the 
subscribers  is  relied  on  to  legalize  the  promoters'  profits,  be  fully 
informed  of  the  facts  and  permitted  to  fairly  exercise  his  own 
judgment  as  to  the  advisability  of  taking  shares.  A  disclosure 
to  some  of  the  subscribers  would  no  doubt  bar  the  consenting  sub- 

The  assent  of  all  the  stockholders  oming  Valley  Ice  Co.,  153  Fed.  Rep. 

will  not,  upon  the  insolvency  of  the  787,  affirmed,  sub  nom.  Wiegand  v. 

company,    bar    the    creditors    from  Albert  Lewis  Lumber  &  Mfg.   Co., 

questioning    the    validity    of   bonds  158  Fed.  Rep.  608,  85  C.  C.  A.  430. 
issued    to    the    promoters    without         30.  See  ante,  §  110. 
adequate  consideration.    In  re  Wy- 


LAWFUL  PROFITS. 


211 


scribers,  and  all  subsequent  transferees  of  their  shares,  from  com- 
plaining of  the  transaction,31  but  the  consent  of  less  than  the 
whole  body  of  the  subscribers  does  not  bind  the  corporation.32 
The  disclosure  to  be  effective  must  be  made  to  all  who  have 
at  the  time  acquired  an  interest  in  the  shares  of  the  company. 
This  includes  those  who  have  by  subscription,  or  otherwise,  agreed 
to  take  shares  from  the  company,  though  the  stock  certificates 
have  not  as  yet  been  issued,33  and  all  who  have  contracted  for  the 


31.  Hughes    v.    Cadena    DeCobre 
Min.   Co.,    13   Ariz.   52,   61,   64,   108* 
Pac.  231,  235;   Old  Dominion  Cop- 
per, etc.,  Co.  v.  Bigelow,  188  Mass. 
315,  325,  74  N.  E.  653,  108  Am.  St. 
Rep.  479,  and  see  post,  §§  121,  127, 
145,  145n,  185. 

32.  Federal. — Davis  v.   Las  Ovas 
Co.,  227  U.  S.  80,  33  Sup.  Ct.  197, 
57  L.  Ed.  426,  affirming,  Las  Ovas 
Co.  v.  Davis,  35  App.  Cas.  Dist.  of 
Col.,  372. 

Arizona. — Hughes  v.  Cadena  De- 
Cobre Min.  Co.,  13  Ariz.  52,  64,  108 
Pac.  231,  234. 

California. — Lomita  L  a^n  d  & 
Water  Co.  v.  Robinson,  154  *Cal.  36, 
51,  97  Pac.  10,  18  L.  R.  A.  N.  S. 
1106,  1132-1133. 

Indiana. — Parker  v.  Boyle,  178 
Ind.  560,  99  N.  E.  986. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  203 
Mass.  159,  198,  89  N.  E.  193,  40  L. 
R.  A.  N.  S.  314;  same  v.  same,  188 
Mass.  315,  325,  74  N.  E.  653,  108  Am. 
St.  Rep.  479. 

Missouri. — Exter  v.  Sawyer,  146 
Mo.  302,  325-326,  47  S.  W.  951,  957. 

New  Jersey. — Bigelow  v.  Old  Do- 
minion Copper,  etc.,  Co.,  74  N.  J.  Eq. 
457,  502, '506,  71  Atl.  153;  Arnold 


v.  Searing,  73  N.  J.  Eq.  262,  265,  67 
Atl.  831. 

New  York. — Colton  Improvement 
Co.  v.  Richter,  26  Misc.  26,  30,  31, 
55  Supp.  486;  Midwood  Park  Co.  v. 
Baker,  128  Supp.  954,  affirmed,  144 
App.  Div.  939,  129  Supp.  1135,  af- 
firmed, 207  N.  Y.  675,  100  N.  E.  1130. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  83-84,  96  Pac.  528, 
533,  quoting  Clark  and  Marshall  on 
Private  Corporations,  §  397. 

United  Kingdom  \ind  Colonies. — 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
1245,  1280,  6  Eng.  Rul.  Cas.  777,  39 
L.  T.  N  S.  269,  27  W.  R.  65,  affirm- 
ing, New  Sombrero  Phosphate  Co.  v. 
Erlanger,  L.  R.  5  Ch.  Div.  73,  113, 
25  W.  R.  436. 

But  see  Urner  v.  Sollenberger,  89 
Md.  316,  43  Atl.  810. 

Mere  dummy  stockholders  need,  of 
course,  not  be  considered.  See  post, 
§  122. 

Disclosure  to  all  but  a  very  few 
subscribers  indicates  an  absence  of 
actual  fraud.  Federal  Life  Ins.  Co. 
v.  Griffin,  173  111.  App.  5,  17. 

33.  Old  Dominion  Copper,  etc., 
Co.  v  Bigelow,  203  Mass.  159,  198, 
89  N.  E.  193,  40  L.  R.  A.  N.  S.  314, 


212  THE  LAW  OF  PROMOTERS. 

purchase  of  shares  and  thus  become  the  equitable  owners  thereof.34 
Some  authorities  seem  to  suggest  that  if  the  promoters  enter  into 
contracts  for  the  sale  of  the  shares  of  a  corporation  to  be  formed 
to  acquire  certain  named  properties  and  to  be  capitalized  upon 
an  agreed  basis,  and  the  corporation  is  organized  as  agreed  and 
the  shares  delivered  to  the  purchasers  in  exact  accordance  with 
the  promoters'  contract,  the  concealment  from  these  purchasers 
of  the  promoters'  profits  gives  rise  to  no  action  by  the  corpora- 
tion.35 This,  however,  is  an  unsound  doctrine  which  should  not 
be  followed.  It  is  true  that  those  who  agreed  to  purchase  stock 
from  the  promoters  receive,  in  such  case,  just  what  they  have  con- 
tracted for,  but  the  same  argument  would,  if  accepted,  require 
the  reversal  of  the  entire  rule  against  secret  profits.  If  the  pro- 
moters, before  the  transaction  complained  of,  contract  for  the 
sale  of  shares  of  the  corporation,  the  purchasers  of  these  shares 
have  from  the  date  of  their  contract  an  interest  in  the  corpora- 
tion, and  the  promoters'  profit  is  not  made  lawful  by  the  assent 
of  the  original  subscribers.  The  legality  of  the  promoters'  profits 
would  not  be  affected  by  the  fact  that  purchasers  of  shares  whose 
interest  was  unknown  to  the  promoters  did  not  have  notice  of 
the  transaction.  The  undisclosed  purchaser  is,  in  such  case, 
bound  by  the  knowledge  and  acquiescence  of  his  vendor. 

Disclosure  of  the  promoters'  profits  must,  in  order  to  render 
the  transaction  lawful,  be  made  not  only  to  all  existing  stock- 
holders, to  all  subscribers  for  shares,  and  to  all  who  have,  to  the 
knowledge  of  the  promoters  acquired  an  equitable  interest  therein 


and  cases  cited ;  Mackey  Baking  Co.  369.     The   court    in    the   case   last 

v.  Mackey,  19  Pa.  Dist  Ct.  893.  cited,  however,  pointed  out  (p.  397), 

34.  See  post,  §  123.  that  it  could  not  assume  that  the 

35.  See  dictum  in  Arnold  v.  Sear-  agreement  for  the  sale  of  the  shares 
ing,   73  N.  J.  Eq.  262,  265,  67  Atl.  was  entered  into  before  the  trans- 
831.     See  also  Hutchinson  v.  Simp-  action   between   the   promoters   and 
son,  92  N.  Y.  App.  Div.  382,  87  Supp.  the  corporation   had   been  consum- 
mated. 


LAWFUL  PROFITS. 


213 


but  also,  according  to  many  authorities,  to  all  who  are,  as  a  part 
of  the  original  scheme,  to  be  brought  in  as  subscribers  for  the 
company's  shares.36  If  disclosure  is  made  to  all  those  who  have, 
at  the  time  of  the  transaction,  a  legal  or  equitable  interest  in  the 
shares  of  the  corporation,  and  to  all  who  are  to  be  brought  in  as 
original  subscribers,  future  purchasers  from  the  promoters  or 
from  other  subscribers  need  not  be  taken  into  account.  They  are 
bound  by  the  knowledge  of  their  vendors.37 

A  question  may  well  arise  as  to  whether  those  purchasing, 
from  the  treasury  of  the  corporation,  shares  which  had  been  im- 
mediately after  their  issue  turned  back  to  the  corporation,  are  to 
be  considered  as  original  subscribers,  or  as  purchasing  indirectly 
from  those  to  whom  these  shares  were  originally  issued.  The  pur- 


36.  Maine. — Mason  v.  Carrothers, 
105  Me.  392,  399,  401-402,  74  Atl. 
1030,  1033,  1034. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  322-327,  74  N.  E.  653,  108 
Am.  St.  Rep.  479 ;  same  v.  same,  203 
Mass.  159,  193,  89  N.  E.  193,  40  L. 
R.  A.  N.  S.  314 ;  Hayward  v.  Leeson, 
176  Mass.  310,  320,  57  N.  E.  656,  49 
L.  R.  A.  725. 

Missouri. — Brooker  v.  William  H. 
Thompson  Trust  Co.,  254  Mo.  125 
158-159,  162  S.  W.  187,  195. 

New  Jersey. — Bigelow  v.  Old  Do- 
minion Copper,  etc.,  Co.,  74  N.  J.  Eq. 
457,  502,  71  Atl.  153. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  83-84,  96  Pac.  528, 
533,  quoting  from.  Clark  &  Marshall 
on  Private  Corporations,  §  397. 

United  Kingdom  and  Colonies. — 
New  Sombrero  Phosphate  Co.  v. 
Erlanger,  L.  R.  5  Ch.  Div.  73,  113, 
25  W.  R.  436,  affirmed,  *w6  nom. 


Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Gas.  1218,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65;  In  re  Leeds  & 
Hanley  Theatres  of  Varieties,  1902, 
2  Ch.  Div.  809,  823,  824. 

Contra  Old  Dominion  Copper, 
etc.,  Co.  v.  Lewisohn,  210  U.  S.  206, 
215,  28  Sup.  Ct.  634,  52  L.  Ed.  1025, 
affirming,  148  Fed.  Rep.  1020,  79  C. 
C.  A.  534,  136  Fed.  Rep.  915.  These 
are  presumably  the  cases  referred  to 
by  Chancellor  Pitney,  in  Bigelow 
v.  Old  Dominion  Copper,  etc.,  Co., 
74  N.  J.  Eq.  457,  at  p.  502,  71  Atl. 
153,  at  p.  172. 

This  question  is  discussed  at 
length  in  subsequent  sections  of  this 
chapter.  See  post,  §§  124-130. 

37.  Mason  v.  Carrothers,  105  Me. 
392,  399,  74  Atl.  1030,  1033,  1036; 
Old  Dominion  Copper,  etc.,  Co.  v. 
Bigelow,  188  Mass.  315,  325,  74  N. 
E.  653,  108  Am.  St.  Rep.  479,  and 
see  post,  §§  121,  127,  145,  185. 


214  THE  LAW  OF  PROMOTERS. 

chasers  of  these  shares  from  the  treasury  of  the  corporation  are  in 
practical  effect  original  subscribers  and  should  be  so  considered.38 

§  112.  Nature  of  the  disclosure. — Constructive  notice. 

A  disclosure  must,  in  order  to  render  lawful  a  transaction  in 
which  the  promoter  has  a  personal  interest,  be  a  full,  complete  and 
direct  statement  of  the  material  facts  relating  thereto.  Reliance 
cannot  be  had  upon  inferences.  "  In  considering  this  question  we 
must,"  says  Sir  Nathaniel  Lindley,  "  recollect  that  we  are  dealing 
with  matters  of  daily  business,  and  must  have  regard  to  the  habits 
and  practical  necessities  of  ordinary  business  men.  Refined  equit- 
able doctrines  of  constructive  notice  have  little,  if  any,  applica- 
tion to  such  matters  as  are  now  being  dealt  with.  To  inform  a 
person  of  a  fact,  is  one  thing ;  to  give  him  the  means  of  finding  it 
out,  if  he  will  take  trouble  enough,  is  another  thing.  A  promoter 
of  a  company,  whose  duty  it  is  to  disclose  what  profits  he  has 
made,  does  not  perform  that  duty  by  making  a  statement  not  dis- 
closing the  facts,  but  containing  something  which,  if  followed  up 
by  further  investigation,  will  enable  the  inquirer  to  ascertain  that 
profits  have  been  made  and  what  they  amounted  to."  39 

In  Gluckstein  v.  Barnes,40  the  promoters,  after  buying  at  a  dis- 

38.  Hinkley    v.    Sac    Oil   &    Pipe  408,    107   N.    W.    629,    633-634,    119 
Line  Co.,  132  Iowa  396,  107  N.  W.  Am.  St.  R.  564;  Brewster  v.  Hatch, 
629,  119  Am.   St.   R.  564.     See  also  122  N.  Y.  349,  361,  25  N.  E.  505,  33 
§  127,  post.  N.  Y.  St.  Rep.  527;  Mackey  Baking 

39.  In  re  Olympia,  Ltd.,  1898,  2  Co.  v.  Mackey,  19  Pa.  Dist.  Ct.  893; 
Ch.  Div.  153,  166,  affirmed,  sub  nom.  Aaron's  Reefs  v.  Twiss,  1896,  App. 
Gluckstein    v.    Barnes,    1900,    App.  Cas.  273,  287;  Lagunas  Nitrate  Co. 
Gas.  240.    Quoted  in  Mason  v.  Car-  v.   Lagunas   Syndicate,  1899,  2  Ch. 
rothers,    105   Me.   392,   403,    74   Atl.  Div.  392,  448,  (dissenting  opinion)  ; 
1030,  1035,  and  in  Arnold  v.  Sear-  New  Brunswick  &  Canada  Railway, 
ing,  78  N.  J.  Eq.  146,  160,  78  Atl.  etc.,   Co.    v.    Muggeridge,   1   Drewry 
762,  768.  &     Smale     363,     372-373,     380-383; 

See     also     Caffee     v.      Berkley,  Dunne  v.  English,  L.  R.  18  Eq.  524, 

141    Iowa    344,     349,    118    N.    W.  535,  and  cases  cited. 

267,    269;    Hinkley    v.     Sac    Oil    &  40.  1900  App.   Cas.   240,   246-247, 

Pipe     Line     Co.,     132     Iowa     396,  249-252,  affirming.     In  re  Olympia, 


LAWFUL  PROFITS.  215 

count  a  mortgage  upon  the  place  of  entertainment  known  as 
"  Olympia  "  and  some  debenture  bonds  of  the  company  by  which 
this  property  was  then  owned,  purchased  the  Olympia  property  at 
public  auction  for  the  sum  of  £140,000,  which  price,  being  suffi- 
cient to  pay  the  face  value  of  all  the  obligations,  yielded  the  pro- 
moters a  profit  of  some  £20,000  upon  the  mortgage  and  de- 
benture bonds.  The  property  was  thereupon  sold  to  the  new 
corporation  for  £180,000.  The  prospectus  disclosed  the  fact 
that  the  property  had  been  purchased  at  auction  for  £140,000 
and  that  the  promoters  were  deriving  a  profit  of  some  £40,000 
upon  the  sale,  and  stated  that  "  any  other  profits  made  by  the 
syndicate  from  interim  investments  are  excluded  from  the  sale 
to  the  company."  The  contention  that  this  reference  to  interim 
investments  was  a  disclosure  of  the  profit  of  £20,000  accruing 
to  the  promoters  as  a  result  of  their  purchase  of  the  mortgage 
and  debenture  bonds  was  overruled  in  all  courts. 

In  Brewster  v.  Hatch,41  it  was  claimed  that  a  statement  that 
the  corporation  was  to  be  capitalized  at  $1,500,000,  divided  into 
shares  of  the  par  value  of  $10  each,  to  be  issued  in  payment  for 
certain  mines,  that  only  a  portion  of  the  shares  were  offered 
for  sale  at  $4  per  share,  and  that  the  stock  was  to  be  fully  paid  up> 
and  non-assessable,  was  a  distinct  notice  to  the  plaintiffs  of  how* 
the  corporation  was  to  be  set  on  foot,  and  that  they  and  the; 
defendant  promoters  were  dealing  solely  as  vendors  and  vendees-* 
The  court,  however,  held  that  the  inference  contended  for  by  the 
defendants  could  not  justly  be  drawn  from  such  meager  dis~ 
closures. 

In  Arnold  v.  Searing,42  it  was  claimed  that  any  one  could  cal- 
culate from  the  data  given  in  the  circular  distributed,  that  after 
the  subscriptions  had  been  satisfied  there  would  be  left  $400,000 

Ltd.,  1898,  2  Ch.  Div.  153,  166-167,          42.  78  N.  J.  Eq.  146,  160,  78  Atl. 

172-173,  178,  180.  768.    Compare  Hutchinson  v.  Simp- 

41.  122  N.   Y.  349,  361,  25  N.  E.  son,  note  43. 
505,  33  St.  Rep.  527. 


216  THE  LAW  OF  PROMOTERS. 

in  bonds  and  $3,000,000  in  stock  which  must  have  been  understood 
to  belong  to  the  promoters.  The  court  said  that  while  it  was  true 
that  such  a  calculation  would  have  shown  this  result,  there  was 
nothing  to  indicate  that  this  surplus  was  intended  as  promotion 
fees,  or  that  the  defendant  promoters  had  any  interest  therein. 

What  might  appear  to  be  an  altogether  too  meager  disclosure 
was  held  sufficient  in  Hutchinson  v.  Simpson.43  In  that  case  a 
paper  was  circulated  by  Moore  &  Schley  under  the  terms  of  which 
the  signers  agreed  to  buy  from  Moore  &  Schley,  the  number  of 
shares  set  opposite  their  names,  of  the  stock  of  a  company  with  a 
capital  of  $30,000,000,  of  which  $15,000,00  was  preferred, 
and  $15,000,000  was  common  stock.  The  paper  stated  that  it 
was  expected  that  "  of  the  capital  aforesaid  all  but  two  and 
one-half  millions  of  preferred  and  one  and  one-quarter  million 
dollars  of  common  stock  to  be  reserved  in  the  treasury  for 
further  corporate  uses,  will  be  issued  in  acquiring  certain 
malt  properties  on  which  you  (Moore  &  Schley)  and  your 
associates  control  options  (or  other  value  as  you  may  deter- 
mine in  lieu  of  any  thereof  that  may  not  be  acquired)  and  for 
working  capital  and  that  a  part  of  the  stock  so  to  be  issued,  to 
wit:  nine  million  dollars  of  preferred  and  four  and  one-half 
million  dollars  of  common  heretofore  underwritten,  will  be  sold 
upon  the  terms  above  stated."  It  appeared  that  Moore  &  Schley 
had  immediately  prior  to  the  organization  of  the  company  pro- 
cured options  on  twenty-five  malting  plants,  and  caused  such 
options  to  be  taken  in  the  name  of  one  Eicks,  their  employee. 
$9,000,000  par  value  of  preferred  and  $4,500,000  of  common 
stock  were  sold,  under  the  agreement  referred  to,  for  the  sum  of 
$9,000,000.  An  additional  $3,000,000  of  preferred  and  $1,- 
500,000  of  common  stock  were  issued,  and  paid  for  by  the  convey- 
ance of  certain  malting  plants.  The  $9,000,000  paid  by  the  sign- 
ers of  the  agreement  with  Moore  &  Schley  provided  all  the  money 

43.  92  N.  Y.  App.  Div.  382,  392,     397-398,  406-107,  87  Supp.  369.    Cf. 

Arnold  v.  Searing,  note  42. 


LAWFUL  PROFITS.  217 

necessary  to  purchase  the  balance  of  the  plants  and  to  provide  the 
required  working  capital.  Eicks  thereupon  entered  into  a  con- 
tract with  the  corporation  to  transfer  to  it  all  the  aforesaid  malt- 
ing plants,  and  to  furnish  it  with  a  working  capital  of  $2,070,000 
in  consideration  of  the  issue  to  him  of  $12,500,000  of  preferred 
and  $13,740,000  of  common  stock,  and  such  contract  having  been 
consummated  and  the  shares  issued  to  Eicks,  he  transferred 
$9,000,000  of  preferred  and  $4,500,000  of  common  stock  to  the 
signers  of  the  agreement  with  Moore  &  Schley,  $3,000,000  of  pre- 
ferred and  $1,500,000  of  common  stock  to  the  owners  of  malting 
plants,  and  caused  $500,000  of  preferred  and  $7,740,000  of 
common  stock  to  be  transferred  to  the  defendants  Moore  & 
Schley  and  their  associates.  The  majority  of  the  court  held  that 
the  agreement  above  set  forth  sufficiently  disclosed  the  transaction 
to  the  signers. 

While  inferences  to  be  drawn  from  facts  disclosed  will  not 
readily  be  charged  to  the  subscribers,  the  subscribers  are  ordi- 
narily chargeable  with  knowledge  of  the  contents  of  the  articles  of 
association  44  and  of  the  by-laws  of  the  corporation,45  and  with 
notice  of  all  matters  that  are  spread  upon  the  corporate  records.46 

44.  Oil  City  Land  &  Imp.  Co.  v.  And  see  post,  §§  253,  257. 

Porter,  99   Ky.   254,  260,  35  S.   W.  45.  West  End  Real  Estate  Co.  v. 

643,  18  Ky.  L.  R.  151.  Claiborne,  97  Va.  734,  750,  34  S.  E. 

West  End  Real  Estate  Co.  v.  Clai-  900,  906,  and  cases  cited,  and  see 

borne,  97  Va.  734,  34  S.  E.  900.  post,  §  257. 

West    End    Real    Estate    Co.    v.  46.  Stewart  v.  St.  Louis  F.  S.  & 

Nash,  51  W.  Va.  341,  41  S.  E.  182.  W.  R.  Co.,  41   Fed.  Rep.  736,  739 ; 

In  re  Anglo  Greek  Steam  Co.,  L.  St.  Louis  F.  S.  &  W.  R.  Co.  v.  Tier- 

R.   2  Eq.  1,  7,  35  Beav.  399,  407;  nan,  37  Kan.  606,  633,  15  Pac.  544, 

Oakes  v.  Turquand,  L.  R.  2  H.  L.  560;  Mason  v.  Carrothers,  105  Me. 

325,  351-352,  and  cases  cited ;  New  392,  403,  74  Atl.  1030,  1035 ;  Pietsch 

Brunswick    &    Canada    Ry.    Co.    v.  v.  Milbrath,  123  Wis.  647,  658,  101  N. 

Conybeare,  9  H.  L.  Gas.  711,  734 ;  Ex  W.  388,  392,  102  N.  W.  342,  68  L.  R. 

parte  Williams,  L.  R.  2  Eq.  216,  218 ;  A.  945,  107  Am.  St.  Rep.  1017. 

In  re  Gold  Co.,  L.  R.  11  Ch.  Div.  701,  As    to    charging    existing    stock- 

719,   48   L.   J.   Ch.   281;    Ex  parte  holders  with  notice  of  what  trans- 

Briggs,  L.  R.  1  Eq.  483.  pires  at  stockholders'  meetings,  see 


218  THE  LAW  OF  PKOMOTERS. 

If,  however,  the  promoters  are  guilty  of  any  active  misrepre- 
sentations, they  will  not,  according  to  the  better  rule,  be  heard 
to  say  that  the  party  deceived  might  by  an  examination  of  the 
corporate  records,  or  of  other  instruments,  have  ascertained  the 
truth.47 

The  subscribers  are  not  chargeable  with  constructive  notice 
of  the  contents  of  recorded  deeds  under  which  the  promoters  ac- 
quired title  to  the  property  afterwards  sold  to  the  corporation.48 

The  mere  reference  in  the  prospectus  to  a  contract  is  not  notice 
to  the  subscribers  of  the  matters  which  could  be  ascertained  by 
an  examination  thereof,49  but  it  has  been  said  that  if  the  pro- 
spectus notifies  the  subscribers  of  a  place  where  the  contract  or  a 
copy  thereof  may  be  examined,  they  are  chargeable  with  knowledge 
of  the  matters  therein  set  forth.50 

§  113.  Waiver  of  disclosure. 

The  promoter  may,  no  doubt,  legalize  his  transactions  with  the 
corporation  by  obtaining  from  the  subscribers  an  express  waiver 

Erlanger    v.    New    Sombrero    Phos-  1896,  App.  Gas.  273,  287. 

phate  Co.,  L.  R.  3  App.  Cas.  1218,  But   see   Brooker   v.    William   H. 

1250-1252,  6  Eng.  Rul.  Cas.  777,  39  Thompson  Trust  Co.,  254  Mo.   125, 

L.  T.  N.  S.  269,  27  W.  R.  65.  160-161,  162  S.  W.  187,  196 ;  Hallows 

As  to  charging  stockholders  with  v.  Fernie,  L.  R.  3  Ch.  App.  467,  477, 

knowledge  of  their  proxies,  see  Fed-  and  compare  Moore  v.  Burke,  4  F. 

eral  Life  Ins.  Co.  v.  Griffin,  173  111.  &  F.  258,  287,  and  see  post,  §  253. 

App.    5,     17;    Tooker    v.    National  50.  New  Sombrero  Phosphate  Co. 

Sugar  Refining  Co.,  80  N.  J.  Eq.  305,  v.  Erlanger,  L.  R.  5  Ch.  Div.  73,  111, 

319,   84   Atl.    10;    Lawrence's   Case,  25   W.   R.   436,   affirmed,   sub   nom. 

L.  R.  2  Ch.  App.  412,  423;  Virginia  Erlanger    v.    New    Sombrero    Phos- 

Land  Co.  v.  Haupt,  90  Va.  533,  19  phate  Co.,  L.  R.  3  App.  Cas.  1218,  6 

S.  E.  168,  44  Am.  St.  .R.  939,  and  see  Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 

post,  §  260.  269,  27  W.  R.   65;    Smith  v.  Chad- 

47.  See  post,  §  253.  wick,  L.  R.  20  Ch.  Div.  27,  57,  46  L. 

48.  Caffee  v.   Berkley,   141   Iowa  T.  N.  S.  702,  aff' d,  L.  R.  9  App.  Cas. 
344,  118  N.  W.  267.  187,   5  Am.  &  Eng.   Corp.   Cas.   23. 

49.  In  re  Olympia,    1898,    2   Ch.  But  see  Re  Sale  Hotel  &  Botanical 
Div.  153,  179-180,    (aff'd,  SM&  nom.  Gardens,  Ltd.,  77  L.  T.  N.   S.  681, 
Gluckstein  v.  Barnes,  1900  App.  Cas.  reversed,  on  other  grounds,  78  L.  T- 
240),  citing  Aaron's  Reefs  v.  Twiss,  N.  S.  368. 


LAWFUL  PROFITS. 


219 


of  the  disclosure  of  the  details  thereof,51  but  the  courts  will  not 
permit  the  promoter,  by  means  of  such  waiver,  to  perpetrate  a 
fraud  upon  the  corporation  or  its  subscribers.52 

§  114.  Facts  that  must  be  disclosed. 

Promoters  desiring  to  sell  to  the  corporation  property  in  which 
they  have  an  interest  are,  under  well  settled  principles  of  law, 
bound  to  fairly  disclose  such  interest.53  The  identity  of  the  real 


51.  Heckscher  v.  Eden  born,  131  N. 
Y.  App.  Div.  253,  257,  264,  115  Supp. 
673,  and  cases  cited,  followed,  137 
N.  Y.  App.  Div.  899,  122  Supp.  1131, 
reversed,  203  N.  Y.  210,  96  N.  E.  441, 
and  cases   cited   in  following  note. 
And   see  cases  cited,   post,   §§   132, 
206. 

52.  MacLeay    v.   Tait,   1906  App. 
Cas.  24,  27,  34,  75  L.  J.  Ch.  N.  S.  90 ; 
Pearson  &  Son,  Ltd.,  v.  Dublin  Cor- 
poration,  1907   App.  Cas.   351,  365, 
and  cases  cited ;  Greenwood  v.  Lea- 
ther   Shod   Wheel  Co.,   1900,   1  Ch. 
Div.  421;  Calthorpe  v.  Trechmann, 
1906  App.  Cas.  24,  75  L.  J.  Ch.  N. 
S.  90,  94  L.  T.  N.   S.  68,  22  Times 
Law  Rep.  149,  and  see  post,  §§  132, 
206. 

53.  Federal. — D ickerman      v. 
Northern  Trust  Co.,  176  U.  S.  181, 
204,  20  Sup.  Ct.  311,  44  L.  Ed.  423, 
citing  Morawetz  on  Corporations,  §§ 
291,  294,  546. 

Kansas. — Hayden  v.  Green,  66 
Kan.  204,  71  Pac.  236. 

Michigan. — Torrey  v.  Toledo  Port- 
land Cement  Co.,  158  Mich.  348,  122 
N.  W.  614. 

Neio  Jersey. — Woodbury  Heights 
Land  Co.  v.  Loudenslager,  55  N.  J. 
Eq.  78,  99,  35  Atl.  436,  affirmed,  56 
N.  J.  Eq.  411,  41  Atl.  1115,  but  modi- 


fied, 58  N.  J.  Eq.  556,  43  Atl.  671; 
Plaquemines  Tropical  Fruit  Co.  v. 
Buck,  52  N.  J.  Eq.  219,  237-238,  27 
Atl.  1094,  44  Am.  &  Eng.  Corp.  Cas. 
686. 

New  York. — Heckscher  v.  Eden- 
born,  203  N.  Y.  210,  222,  96  N.  E. 
441,  reversing,  137  App.  Div.  899, 
122  Supp.  1131,  which  followed, 
Heckscher  v.  Edenborn,  131  App. 
Div.  253,  258,  115  Supp.  673. 

Oregon. — Stanley  v.  Luse,  36  Or. 
25,  58  Pac.  75. 

Vermont. — Paddock  v.  Fletcher, 
42  Vt.  389. 

United  Kingdom  and  Colonies. — 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
1229,  1236,  6  Eng.  Rul.  Cas.  777,  39 
L.  T.  N.  S.  269,  27  W.  R.  65,  affirm- 
ing, New  Sombrero  Phosphate  Co.  v. 
Erlanger,  L.  R.  5  Ch.  Div.  73,  112, 
119-120,  25  W.  R.  436;  In  re  Leeds 
&  Hanley  Theatres  of  Varieties, 
1902,  2  Ch.  Div.  809,  823,  825,  828, 
831-832;  Bentinck  v.  Fenn,  L.  R. 
12  App.  Cas.  652,  661,  671,  affirming, 
In  re  Cape  Breton  Co.,  L.  R.  29  Ch. 
Div.  795,  803;  Ladywell  Mining  Co. 
v.  Brookes,  L.  R.  35  Ch.  Div.  400, 
414,  17  Am.  &  Eng.  Corp.  Cas.  22. 

It  is  held  in  Advance  Realty  Co. 
v.  Nichols,  126  Minn.  267,  148  N.  W. 


220  THE  LAW  OF  PROMOTERS. 

promoters  should  also  be  disclosed,  and  not  concealed  by  means 
of  dummies.54  It  is  not  sufficient  to  state,  in  general  terms,  that 
some  of  the  promoters  are  interested  in  the  transaction,  but  the 
particular  promoters  that  are  so  interested  should  be  made 
known.55 

Whether  the  precise  nature  and  extent  of  the  interest  of  the 
promoters  must  be  disclosed  is  a  question  not  free  from  doubt.56 
If  the  promoters  acquired  the  property  which  they  are  selling 
to  the  corporation  before  they  became  its  promoters,  the  extent 
of  their  profits  does  not  concern  the  corporation.57  *  The  impor- 
tant fact  is  that  they  have  an  interest  adverse  to  the  corporation, 
and  it  may  be  sufficient  for  them  to  make  known  that  fact  without 
stating  the  extent  of  their  interest  in  the  transaction.58  If, 
however,  the  promoters  acquired  their  interest  in  the  property 
after  they  had  entered  upon  the  relation  of  promoters  to  the 
corporation,  when  it  had  become  their  duty  to  act  for  the  corpo- 
ration, the  profits  gained  by  reason  of  such  interest  belong  pri- 
marily to  the  corporation  and  are  not  rendered  lawful  unless  there 
be  disclosed,  not  only  the  existence  of  the  adverse  interest  of  the 
promoters,  but  the  precise  nature  of  that  interest  and  the  extent 

65,  that  if  the  fact  that  a  commis-  N.  S.  269,  27  W.  R.  65. 
sion  was  to  be  received  by  the  pro-  56.  Whether     the     disclosure     is 
moters    was    disclosed,    it    is    not  made,  on  the  one  hand   to  the  di- 
material  that  the  amount  of  such  rectors,  or  on  the  other  to  the  sub- 
commission  was  not  disclosed.  scribers,  may  have  some  bearing  on 

54.  In  re  Darby,  1911,  1  K.  B.  95,  this   question.     Liquidators   of   the 
101,  102,  80  L.  J.   K.  B.  Div.  180.  Imperial  Mercantile  Credit  Assoc.  v. 
And  see  Ex  parte  Preston,  37  L.  J.  Coleman,  L.  R.  6  H.  L.  189,  206. 

Ch.  N.  S.  618,  19  L.  T.  N.   S.  138.          57.  See  §  115. 

And  see  ante,  §  87n  and  post,  §  216.          58.  See  Tllleny  v.  Wolverton,  54 

55.  Spaulding  v.  North  Milwaukee  Minn.  75,  55  N.  W.  822 ;  U.  S.  Steel 
Town   Site  Co.,  106  Wis.  481,  493,  Corporation  v.  Hodge,  64  N.  J.  Eq. 
494,  81  N.  W.  1064,  1068;  New  Som-  807,    816,    54    Atl.    1,    60   L.    R.    A. 
brero  Phosphate  Co.  v.  Erlanger,  L.  742.      See   also    Beatty   v.    Guggen- 
R.  5  Ch.  Div.  73,  112,  119-120,  25  W.  helm    Exploration    Co.,    N.    Y.    Law 
R.  436,  affirmed,  L.  R.  3  App.  Gas.  Journal,  June  25, 1913,  reversed,  167 
1218,  6  Eng.  Rul.  Gas.  777,  39  L.  T.  N.  T.  App.  Div.  864,  153  Supp.  757. 


LAWFUL  PROFITS. 


221 


of  the  profits  which  they  are  withholding  from  the  corporation.59 
If  the  board  of  directors  is  subject  to  the  domination  or  influ- 
ence of  the  promoters,  there  should  be  disclosed  to  the  subscribers, 
not  only  all  the  material  facts  in  regard  to  the  proposed  trans- 
action, but  also  the  fact  that  the  directors  are  not  independent, 
so  that  the  subscribers  are,  not  only  in  a  position  to  exercise  their 
own  judgment  as  to  the  transaction,  but  aware  of  the  fact  that 
they  cannot  rely  upon  the  judgment  of  the  directors.60  If  the 
solicitor  of  the  company  in  process  of  formation  is  also  the  solic- 
itor for  the  promoters  and  vendors,  that  fact  should  be  disclosed 
to  the  subscribers.61 

If  the  property  which  the  promoters  propose  to  sell  to  the 
corporation  is  not  owned  by  them,  but  merely  controlled  by  means 
of  options,  and  the  promoters  intend  to  allow  such  options  to 
lapse  unless  they  succeed  in  floating  a  corporation  to  take  the 
property  off  their  hands,  such  intention  should  be  disclosed.62 


59.  Liquidators    of   the    Imperial 
Mercantile     Credit     Association     v. 
Coleman,  L.   R.  6  H.   L.   189,   200; 
Bagnall  v.  Carlton,  L.  R.  6  Ch.  Div. 
371,  385;   Dunne  v.  English,  L.  R. 
18   Eq.   524;    Emma    Silver   Mining 
Co.  v.  Grant,  L.  R.  11  Ch.  Div.  918, 
937 ;  Beatty  v.  Guggenheim  Explora- 
tion Co.,  N.  Y.  Law  Journal,  June 
25,   1913,  reversed,   167  N.  Y.   App. 
Div.  864,  153  Supp.  757.     See  post, 
§  115. 

Compare  Advance  Realty  Co.  v. 
Nichols,  126  Minn.  267,  148  N.  W. 
65. 

60.  Erlanger    v.    New    Sombrero 
Phosphate  Co.,   L.   R.   3   App.   Cas. 
1218,  1231-1232,   1262,  1280,  6  Eng. 
Rul.  Cas.  777,  39  L.  T.  N.  S.  269,  27 
W.  R.   65;   Lagunas  Nitrate  Co.  v. 
Lagunas  Syndicate,  1899,  2  Ch.  Div. 
392,  425,  426,  462;   In  re  Leeds  & 


Hanley  Theatres  of  Varieties,  1902, 
2  Ch.  Div.  809,  814;  Ex  parte 
Williams,  L.  R.  2  Eq.  216,  where  the 
directors  received  a  part  of  the  pro- 
moter's profits. 

61.  Erlanger    v.    New    Sombrero 
Phosphate  Co.,   L.   R.  3  App.  Cas. 
1218,   1231-1232,   1246-1249,   6   Eng. 
Rul.  Cas.  777,  39  L.  T.  N.  S.  269,  27 
W.  R.  65.    See  also  Bagnall  v.  Carl- 
ton,  L.  R.  6  Ch.  Div.  371,  401^02, 
404,  409;  Phosphate  Sewage  Co.  v. 
Hartmont,  L.  R.  5  Ch.  Div.  394,  443- 
444,  452,  46  L.  J.  Ch.  661. 

62.  Brewster  v.  Hatch,  122  N.  Y. 
349,  362,  25  N.  E.  505,  33  St.  Rep. 
527,    cited    in    Woodbury    Heights 
Land  Co.  v.  Loudenslager,  55  N.  J. 
Eq.  78,  92,  35  Atl.  436,  (affirmed,  56 
N.  J.  Eq.  411,  41  Atl.  1115,  but  modi- 
fled,  58  N.  J.  Eq.  556,  43  Atl.  671). 


222  THE  LAW  OF  PROMOTERS. 

In  Omnium  Electric  Palaces  Lim.  v.  Baines,63  the  promoters 
had  sold  a  lease  to  the  corporation.  It  was  claimed  that  they 
should  have  disclosed  the  fact  that  they  did  not  have  a  legally 
binding  agreement  for  such  lease.  The  court  held  that  as  the 
lease  had  in  fact  been  subsequently  granted  in  accordance  with 
the  negotiations,  and  the  company  had  obtained  all  that  it  was 
intended  to  get,  it  suffered  nothing  by  reason  of  the  so-called 
agreement  being  unenforceable  in  a  legal  sense,  and  that  the  omis- 
sion was  not  material. 

« 

§  115.  Necessity  of  disclosing  the  price  paid  for  property  by 

the  promoter. 

Whether  the  price  which  the  promoter  paid  for  the  property 
and  the  extent  of  the  profit  which  he  is  deriving  upon  its  resale 
to  the  corporation  must  be  disclosed,  depends  upon  whether  the 
property  was  acquired  by  the  promoter  before,  or  after,  he  en- 
tered upon  that  relation  to  the  corporation.  If  the  property  was 
owned  by  the  promoter  before  the  promotion  was  undertaken, 
the  price  that  he  paid  therefor,  whether  he  paid  a  large  price  or 
a  small  price  or  whether  he  acquired  the  property  by  gift,  in  no 
way  concerns  the  corporation.64  The  fact  remains  that  he  owns 
the  property  and  may  dispose  of  it  as  he  sees  fit.  He  must,  as 
has  already  been  shown,  make  known  that  he  deals  with  the  corpo- 
ration at  arm's  length,  but  the  cost  of  the  property  and  the  ex- 
tent of  his  profit  on  the  resale  need  not  be  disclosed.65  The  only 

63.  1914,  1  Ch.  Div.  332,  82  L.  J.  Greenville  Screw  Point  Steel  Fence 
Ch.  N.  S.  519,  109  L.  T.  N.  S.  206.  Post  Co.,  23  Ohio  C.  C.  274,  279. 

64.  Highway    Advertising    Co.    v.  Oregon. — Wills    v.    Nehalem    Coal 
Ellis,  7  Ont.  L.  R.  504,  511.  Co.,  52  Or.   70,  78-80,  96  Pac.  528, 

65.  California. — Burbank  v.  Den-  531-532. 

nis,  101  Cal.  90,  98-99,  35  Pac.  444,  Pennsylvania. — Densmore  Oil  Co. 

446-447.  v.  Densmore,  64  Pa.  43,  49;  Mc- 

Neic  York. — See  Home  Trust  Co.  Elhenny's  Appeal,  61  Pa.  188,  194- 

v.  Bauchens,  151  App.  Div.  416,  195;  Lungren  v.  Pennell,  10  Weekly 

135  Supp.  881.  Notes  Gas.,  297,  13  Cent.  L.  J.  211. 

Ohio. — Second   National   Bank   v.  Virginia. — Richlands    Oil    Co.    v. 


LAWFUL  PROFITS. 


223 


importance  of  the  price  paid  for  the  property  by  the  promoter 
lies  in  the  fact  that  the  promoter  must  satisfy  himself  that  the 
property  he  sells  to  the  corporation  is  actually  worth  the  price 
which  he  receives  therefor,66  and  the  circumstance  that  the  prop- 
erty was,  only  a  short  time  before,  purchased  by  him  at  a  price 
very  much  less  than  that  paid  by  the  corporation,  tends  to  show 
that  the  property  is  not  actually  worth  the  higher  price.67  The 
discrepancy  in  price  is,  of  course,  open  to  explanation.68 

If,  however,  the  promoter  had  before  he  purchased  the  prop- 
erty already  entered  upon  the  relation  of  promoter  to  the  cor- 
poration, it  was  his  duty  to  make  the  purchase  for  the  benefit  of 


Morriss,  108  Va.  288,  294,  61  S.  E. 
762,  764,  citing  Cook  on  Corpora- 
tions. 

Wisconsin. — Milwaukee  Cold  Stor- 
age Co.  v.  Dexter,  99  Wis.  214, 
229,  74  N.  W.  976,  981,  40  L.  R.  A. 
837,  842. 

United  Kingdom  and  Colonies. — 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
1244,  see  also  pages  1267-1268,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65,  (overruling  on  this 
point  the  opinion  below,  L.  R.  5 
Ch.  Div.  73,  112,  25  W.  R.  436)  ; 
Cover's  Case,  L.  R.  1  Ch.  Div.  182, 
affirming,  L.  R.  20  Eq.  114;  La- 
gunas  Nitrate  Co.  v.  Lagunas  Syndi- 
cate, 1899,  2  Ch.  Div.  392,  431, 
(Rigby,  L.  J.,  dissenting,  445,  453) ; 
Foss  v.  Harbottle,  2  Hare  461,  489; 
Craig  v.  Phillips,  L.  R.  3  Ch.  Div. 
722;  Twycross  v.  Grant,  L.  R.  2  C. 
P.  D.  469,  488;  Re  the  Waterloo 
Life,  etc.,  Ass.  Co.,  33  Beav.  204. 

Contra  St.  Louis  F.  S.  &  W.  R. 
Co.  v.  Tiernan,  37  Kan.  606,  632,  15 
Pac.  544,  559.  See  In  re  Lady  For- 


rest Gold  Mine,  Ltd.,  1901,  1  Ch. 
Div.  582 ;  South  Durham  Iron  Co.  v. 
Shaw,  Weekly  Notes,  1879,  159. 

66.  New  Sombrero  Phosphate  Co. 
v.  Erlanger,  L.  R.  5  Ch.  Div.  73,  97, 
25   W.   R.   436,   affirmed,  sub  nom. 
Erlanger    v.    New    Sombrero    Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  Weekly  Rep.  65;  In  re  Hess 
Mfg.  Co.,  23  Can.  Sup.  Ct.  £44,  657- 
658,  667-668;   Lagunas  Nitrate  Co. 
v.   Lagunas   Syndicate,   1899,  2  Ch. 
Div.  392,  410-411. 

67.  Wills  v.  Nehalem  Coal  Co.,  52 
Or.    70,    79-80,    96    Pac.    528,    532; 
Downey  v.  Finucane,  205  N.  Y.  251, 
98  N.  E.  391,  40  L.  R.  A.  N.  S.  307. 
Chamberlayne  on  the  Modern  Law 
of  Evidence,  §§  2159  and  2175c. 

68.  Milwaukee  Cold    Storage  Co. 
v.  Dexter,  99  Wis.  214,  227-228,  7^4 
N.   W.   976,  40   L.   R.   A.   837,   841; 
Bentinck   v.    Fenn,    L.    R.    12    App. 
Cas.  652,  660,  affirming,  In  re  Cape 
Breton  Co.,  L.  R.  29  Ch.  Div.  795, 
affirming,  L.  R.  26  Ch.  Div.  221. 


224 


THE  LAW  OF  PROMOTERS. 


the  corporation.  The  corporation  is,  therefore,  entitled  to  receive 
the  property  at  its  cost  to  the  promoter,  and  he  cannot  retain  a 
profit  made  by  him  on  the  resale  without  disclosing  the  price 
which  he  paid  for  the  property  and  the  extent  of  his  profit  from 
the  transaction.69 

The  distinction  between  the  case  where  the  promoter  was  the 
owner  of  the  property  in  question  before  he  undertook  the  promo- 
tion of  the  corporation,  and  the  case  where  he  acquired  the  prop- 
erty after  he  entered  upon  the  promotion,  is  well  stated  in  the 
leading  case  of  Densmore  Oil  Co.  v.  Densmore,70  where  the  court 


69.  California. — Burbank  v.  Den- 
nis, 101  Gal.  90,  98,  35  Pac.  444, 
447. 

Missouri. — Exter  v.  Sawyer,  146 
Mo.  302,  323,  47  S.  W.  951,  956. 

New  Jersey. — See  v.  Heppen- 
heimer,  69  N.  J.  Eq.  36,  72,  61  Atl. 
843 ;  Woodbury  Heights  Land  Co.  v. 
Loudenslager,  55  N.  J.  Eq.  78,  87, 
89,  96,  35  Atl.  436,  affirmed,  56  N.  J. 
Eq.  411,  41  Atl.  1115,  but  modified, 
58  N.  J.  Eq..  556,  43  Atl.  671. 

New  Yorfc. — Brewster  v.  Hatch, 
122  N.  Y.  349,  362,  25  N.  E.  505, 
33  St.  Rep.  527;  Colton  Improve- 
ment Co.  v.  Richter,  26  Misc.  26,  30, 
55  Supp.  486. 

Pennsylvania. — Simons  ,v.  Vulcan 
Oil  &  Mining  Co.,  61  Pa.  202,  217- 
218,  100  Am.  Dec.  628;  Densmore 
Oil  Co.  v.  Densmore,  64  Pa.  43,  50. 

Virginia. — Richlands  Oil  Co.  v. 
Morriss,  108  Va.  288,  61  S.  E.  762. 

A  disclosure  that  property  con- 
veyed to  the  company  at  $1100  an 
acre,  cost  the  directors  only  $1000 
an  acre,  is  insufficient  if  the  fact 
that  the  property  which  was  sold  to 
the  company  as  8.09  acres  (its  true 
acreage),  was  purchased  and  paid 


for  by  the  directors  as  6  1-2  acres, 
is  not  also  disclosed.  Spaulding  v. 
North  Milwaukee  Town  Site  Co., 
106  Wis.  481,  494,  81  N.  W.  1064, 
1068. 

It  was  held  in  Lomita  Land  & 
Water  Co.  v.  Robinson,  154  Cal.  36, 
49,  97  Pac.  10,  18  L.  R.  A.  N.  S. 
1106,  1128-1130,  that  if  the  sub- 
scribers knew  that  a  profit  was  re- 
tained, the  mere  fact  that  they  were 
not  told  the  amount  of  such  profit 
did  not  entitle  them  to  complain. 
The  defendant  who  retained  the 
profit  in  that  case,  was,  however, 
not  a  promoter,  and  the  question  as 
to  his  right  to  retain  his  profit  arose 
out  of  the  fact  of  his  being  a  sub- 
scriber for  the  shares  of  the  com- 
pany, (see  ante,  §  9).  The  rule 
may,  in  such  case,  be  different. 

It  is  not  thought  that  anything 
contrary  to  the  rule  stated  in  the 
text,  is  intended  by  the  dictum  in 
Blum  v.  Whitney,  185  N.  Y.  232, 
240-241,  77  N.  E.  1159,  reargument 
denied,  185  N.  Y.  620,  78  N.  E.  1099. 

70.  64  Pa.  43,  49-50. 

See  also : 

Arkansas. — Tegarden  Bros.  v.  Big 


LAWFUL  PROFITS.  225 

said,  "  There  are  two  principles  applicable  to  all  partnerships  or 
associations  for  a  common  purpose  of  trade  or  business,  which  ap- 
pear to  be  well  settled  on  reason  and  authority.  The  first  is,  that 
any  man  or  number  of  men,  who  are  the  owners  of  any  kind  of 
property,  real  or  personal,  may  form  a  partnership  or  association 
with  others,  and  sell  that  property  to  the  association  at  any  price 
which  may  be  agreed  upon  between  them,  no  matter  what  it  may 
have  originally  cost,  provided  there  be  no  fraudulent  misrepre- 
sentation made  by  the  vendors  to  their  associates.  They  are  not 
bound  to  disclose  the  profit  which  they  may  realize  by  the  trans- 
action. They  were  in  no  sense  agents  or  trustees  in  the  original 
purchase,  and  it  follows,  that  there  is  no  confidential  relation  be- 
tween the  parties,  which  affects  them  with  any  trust.  It  is  like 
any  other  case  of  vendor  and  vendee.  They  deal  at  arm's  length. 
Their  partners  are  in  no  better  positions  than  strangers.  They 
must  exercise  their  own  judgment  as  to  the  value  of  what  they 
buy.  As  it  is  succinctly  and  well  stated  in  Foss  v.  Harbottle,  £ 
Hare  489,  '  A  party  may  have  a  clear  right  to  say,  I  begin  the 
transaction  at  this  time.  I  have  purchased  land,  no  matter  how 
or  from  whom,  or  at  what  price.  I  am  willing  to  sell  it  at  a  cer- 
tain price  for  a  given  purpose.'  ....  The  second  prin- 
ciple is,  that  where  persons  form  such  an  association,  or  begin 
or  start  the  project  of  one,  from  that  time  they  do  stand  in 
a  confidential  relation  to  each  other  and  to  all  others  who  may 
subsequently  become  members  or  subscribers,  and  it  is  not  corn- 
Star  Zinc  Co.,  71  Ark.  277,  280-281,  Pennell,  10  Weekly  Notes  Cas.,  297, 
72  S.  W.  989,  990-991.  13  Cent.  L.  J.  211. 

California. — Burbank  v.  Dennis,  Virginia. — Richlands  Oil  Co.  v. 
101  Cal.  90,  98-99,  35  Pac.  444,  446-  Morriss,  108  Va.  288,  294-295,  61 
447.  S.  E.  762,  764,  quoting  Cook  on  Cor- 

Missouri. — Exter   v.    Sawyer,   146      porations,   (4th  ed.),  §  651. 
Mo.  302,  320-321,  47  S.  W.  951,  956.          Wisconsin.— M  i  1  w  a  u  k  e  e     Cold 
Pennsylvania. — Simons  v.   Vulcan      Storage  Co.  v.  Dexter,  99  Wis.  214, 
Oil  &  Mining  Co.,  61  Pa.  202,  217-      74  N.  W.  976,  40  L.  R.  A.  837. 
218,  100  Am.  Dec.  628;  Lungren  v. 


226  THB  LAW  OF  PROMOTERS. 

petent  for  any  of  them  to  purchase  property  for  the  purposes  of 
such  a  company,  and  then  sell  it  at  an  advance  without  a  full  dis- 
closure of  the  facts.  They  must  account  to  the  company  for  the 
profit,  because  it  legitimately  is  theirs.  It  is  a  familiar  principle 
of  the  law  of  partnership,  that  one  partner  cannot  buy  and  sell 
to  the  partnership  at  a  profit;  nor  if  a  partnership  is  in  contem- 
plation merely,  can  he  purchase  with  a  view  to  a  future  sale,  with- 
out accounting  for  the  profit.  Within  the  scope  of  the  partner- 
ship business,  each  associate  is  the  general  agent  of  the  others,  and 
he  cannot  divest  himself  of  that  character  without  their  knowledge 
and  consent." 

§  116.  The  same  subject. — Effect  of  independent  board  of  di- 
rectors. 

It  seems  to  be  laid  down  in  Old  Dominion  Copper,  etc.,  Co.  v. 
Bigelow,71  that  the  promoters  selling  their  own  property  to  the 
corporation  must,  unless  the  corporation  is  represented  by  an 
independent  board  of  directors,  disclose  the  price  at  which  they 
themselves  acquired  the  property,  though  they  acquired  the  prop- 
erty before  they  became  promoters.  "  Being  the  absolute  own- 
ers of  it,  the  defendant  and  Lewisohn  (the  promoters),  could  do 

with  that  property  as  they  pleased If  they  chose 

to  sell  it  to  a  stranger  they  could  make  the  sale  at  arm's  length, 
they  could  ask  any  price  they  pleased,  and  were  under  no  legal  ob- 
ligation to  state  what  it  had  cost  them.  On  the  other  hand,  if  they 
elected  to  make  a  sale  of  it  to  one  standing  to  them  in  a  fiduciary 
relation,  they  were  under  an  obligation  to  make  a  full  disclosure 
to  the  beneficiary  of  all  the  facts  known  to  them  material  to  the 
property  and  the  purchase,  or  see  to  it  that  the  fiduciary  had  ade- 
quate independent  advice.  That  is  an  obligation  resting  upon 

71.  188  Mass.  315,  322,  (see  also  rothers,  105  Me.  392,  74  Atl.  1030. 
327-328),  74  N.  B.  653,  108  Am.  St.  Cf.  Liquidators  of  the  Imperial  Mer- 
Bep.  41ft,  quoted  in  Mason  v.  Car-  cantile  Credit  Assoc.  v.  Coleman,  L. 

B.  6  H.  L.  189,  206. 


LAWFUL  PROFITS.  227 

every  fiduciary  who  makes  a  sale  of  his  own  property  to  his  bene- 
ficiary, no  matter  whether  it  is  a  case  of  trustee  and  cestui  que 
trust,  guardian  and  ward,  solicitor  and  client,  or  promoter  of  a 
corporation  and  the  corporation  itself.  There  is  no  pretense  that 
in  the  transaction  in  question  the  plaintiff  corporation  was  rep- 
resented by  an  independent  board." 

It  is  not  probable  that  this  limitation  upon  the  rule  that  a 
promoter  selling  his  own  property  to  the  corporation  need  not 
disclose  its  cost  to  him,  will  be  generally  followed. 

§117.  Misrepresentations  as  to  cost  of  property. 

Although  promoters  who  acquired  property  before  they  be- 
came promoters  may,  under  the  well  established  rules  referred  to 
in  the  preceding  sections,  subsequently  sell  such  property  to  the 
corporation  without  disclosing  its  cost  to  them,  they  are  guilty 
of  fraud  if  they  misstate  such  cost,72  or  if  they  falsely  profess  that 
they  acted  for  the  corporation  in  making  the  original  purchase 
when  they  did  in  fact  acquire  the  property  at  a  lesser  figure  and 
are  deriving  a  profit  from  the  resale.73 

§  118.  Ratification  of  promoter's  profits. 

The  Supreme  Court  of  Massachusetts,  as  set  forth  in  the  first 
section  of  this  chapter,  stated  as  the  third  method  of  legalizing  a 
transaction  between  the  promoter  and  the  corporation  that  "  he 
(the  promoter)  may  procure  a  ratification  of  the  contract  after 
disclosing  its  circumstances  by  vote  of  the  stockholders  of  the 

72.  Gluckstein    v.    Barnes,    1900,  90,  35  Pac.  444;  Getty  v.  Devlin,  54 
App.    Gas.     240,     affirming,    In    re  N.  Y.  403,  70  N.  Y.  504;  Simons  v. 
Olympia,  Ltd.,  1898,  2  Ch.  Div.  153 ;  Vulcan  Oil  &  Mining  Co.,  61  Pa.  202, 
Kent  v.  Freehold  Land  &  Brickmak-  217-218,    220,    100    Am.    Dec.    628 ; 
ing  Co.,  L.  R.  4  Eq.  588,  17  L.  T.  Pittsburg  Mining  Co.  v.  Spooner,  74 
N.     S.     77,     reversed     on     another  Wis.  307,  42  N.  W.  259,  17  Am.  St. 
ground,  L.  R.  3  Ch.  App.  493.  Rep.  149,  24  Am.  &  Eng.  Corp.  Gas. 

See  post,  §§  162,  214,  214n,  231.  1;   Foss  v.  Harbottle,  2  Hare  461, 

73.  Burbank  v.  Dennis,  101  Gal.      489. 


228  THE  LAW  OF  PROMOTERS. 

completely  established  corporation."  There  can  be  no  question 
that  in  the  absence  of  intervening  rights  of  creditors  a  trans- 
action between  the  corporation  and  the  promoter  may,  after  the 
corporation  is  fully  organized  and  its  stock  issued,  be  effectually 
ratified  by  the  unanimous  vote  of  the  entire  body  of  stockholders 
acting  with  full  knowledge  of  all  the  facts.74  The  authorities  are 
not  in  accord  as  to  whether  the  unanimous  ratification  of  the 
stockholders  is  effective  though  obtained  at  a  time  when  the  fur- 
ther issue  of  original  shares  to  other  subscribers  is  in  contempla- 
tion.75 

§119.  Ratification  by  majority  stockholders,  or  by  board  of 

directors. 

Whether  a  ratification  of  the  promoter's  transaction  with  the 
corporation  may  be  effectuated  by  anything  less  than  the 
unanimous  vote  of  the  entire  body  of  stockholders — that  is  by  a 
majority  vote  of  the  stockholders,  or  by  the  board  of  directors — 
is  a  question  upon  which  the  authorities  render  but  little  assist- 
ance. 

74.  Federal. — Stewart  v.  St.  Louis  Sugar  Refining  Co.,  80  N.  J.  Eq.  305, 

Ft.  S.  &  W.  R.  Co.,  41  Fed.  Rep.  736,  317-318,  84  Atl.  10,  that  the  ratifica- 

738.  tion   by   the   stockholders   does  not 

Illinois. — Federal   Life   Insurance  make  lawful,   shares  issued  to  the 

Co.  v.  Griffin,  173  111.  App.  5,  19.  piomoters  without  consideration,  in 

Indiana. — Parker    v.    Boyle,    178  violation    of   the    statute   providing 

Ind.  560,  99  N.  E.  986.  that  nothing  but  money  or  property 

Massachusetts. — O  1  d       Dominion  necessary  for  its  business  shall  be 

Copper,    etc.,    Co.    v.    Bigelow,    203  considered  as  payment  for  stock. 
Mass.   159,  178,  192,  198,   89  N.  E.          75.  See    Old    Dominion    Copper, 

193,  40  L.  R.  A.  N.  S.  314.  etc.,  Co.  v.  Bigelow,  203  Mass.  159, 

New  Jersey.— Bigelow  v.  Old  Do-  196,  197,  89  N.  E.  193,  40  L.  R.  A.  N. 

minion  Copper,  etc.,  Co.,  74  N.  J.  Eq.  S.  314 ;  same  v.  same,  188  Mass.  315, 

457,  506,  71  Atl.  153.  74  N.  E.  653,  108  Am.  St.  Rep.  479, 

New    York. — Heckscher    v.    Eden-  Cf.  Old  Dominion  Copper,  etc.,  Co. 

born,    131   App.    Div.   253,   257,   115  v.  Lewisohn,  210  U.  S.  206,  28  Sup. 

Supp.   673,  followed,   137  App.  Div.  Ct.   634,   52  L.   Ed.   1025,   affirming, 

899,   122   Supp.   1131,   reversed,  203  148  Fed.  Rep.  1020,  79  C.  C.  A.  534, 

N.  Y.  210,  96  N.  E.  441.  136  Fed.  Rep.  915.    See  post,  §§  124- 

It  is  held  in  Tooker  v.  National  130. 


LAWFUL  PROFITS.  £29 

It  has  already  been  stated  that  if  the  acquiescence  of  the  sub- 
scribers is  relied  upon  for  the  legalization  of  the  promoter's  trans- 
action with  the  corporation,  the  consent  of  each  subscriber  must 
be  shown.76  If  the  promoter  could  by  a  majority  vote  of  the 
stockholders  of  the  fully  organized  corporation  obtain  a  complete 
ratification  of  his  transaction  with  the  corporation,  he  could  in 
effect  legalize  his  transaction  by  the  consent  of  less  than  the 
whole  body  of  the  subscribers,  and  so  nullify  the  rule  in  regard  to 
unanimous  consent.  There  need,  therefore,  be  little  hesitation  in 
saying  that  the  promoter  can  be  completely  exonerated  by  the 
stockholders,  only  by  the  unanimous  ratification  of  the  entire 
body.  The  promoter's  transaction  with  the  corporation  is,  as 
stated  in  a  preceding  section,77  lawful  if  the  transaction  is  ap- 
proved by  an  independent  board  of  directors.  As  a  body  has 
ordinarily  power  to  ratify  what  it  can  in  the  first  instance  au- 
thorize, it  might  be  inferred  that  the  transaction  of  the  promoters 
with  the  corporation  could  be  completely  ratified  and  the  pro- 
moter exonerated  from  all  liability  by  a  resolution  of  the  board  of 
directors.  An  acceptance  of  this  doctrine,  would,  however,  lead 
to  the  absurd  result  that  a  transaction  which  could  not  be  rati- 
fied by  a  majority  vote  of  the  stockholders,  could  be  ratified  by 
the  directors  whom  this  majority  elects.78 

The  difficulty  may  be  resolved  by  a  consideration  of  the  differ- 
ence between  the  situation  at  the  time  that  the  promoters  offer 
their  property  to  the  corporation,  and  the  situation  which  exists 

76.  See  ante,  §  111,  et  seq.  that  the  consent  of  the  subscribers 

77.  See  ante,  §  110,  et  seq.  is  asked  at  a  time  when  they  have 

78.  It  may  be  thought  that  the  not    really    assumed    toward    each 
same  absurdity  arises  when  the  rule  other  the  relation  of  fellow  stock- 
is   laid    down    that    the   promoters'  holders,  and  when  they  are  as  yet 
profits  are  lawful  if  consented  to  at  in  no  position  to  act  for  each  other, 
the  outset  by  an  independent  board  The  consent  of  the  directors  is  only 
of  directors,  but  are  not  made  law-  effective  after  they  are  duly  quali- 
ful  by  the  consent  of  the  majority  fled  and  properly  represent  the  cor- 
of  the  subscribers.    The  answer  is  poration. 


230  THE  LAW  OF  PROMOTERS. 

when  a  ratification  of  their  transaction  is  sought.  When  the 
promoters  offer  to  sell  to  the  corporation,  they  are  in  a  position 
to  bargain  with  it,  to  fix  a  price  at  which  they  will  sell  and  to 
refuse  to  deal  on  other  terms.  An  independent  board  of  directors 
may  then  decide  whether  the  proposition  submitted  is  acceptable. 
If  the  transaction  is  not  approved  by  an  independent  board  of 
directors  at  the  time,  and  the  promoters  do  not  seek  protection  by 
vote  of  the  directors  until  after  the  transaction  has  been  consum- 
mated, the  corporation  has  an  election  to  rescind  the  transaction 
and  recover  the  purchase  price,  to  retain  the  property  and  bring 
suit  for  damages,  or,  in  some  cases,  to  compel  an  accounting  for 
secret  profits.79  The  promoters  are  in  such  case  in  no  position 
to  bargain.  There  is  no  consideration  for  the  exoneration  of  the 
promoters,  and  the  directors  have  no  power  to  give  away  any 
rights  of  the  corporation.80  The  board  of  directors  has  power 
to  determine  for  the  corporation  whether  or  not  its  purchase  shall 
be  rescinded,81  but  any  action  by  the  board  of  directors  attempt- 
ing to  surrender  the  right  of  the  corporation  to  maintain  against 
the  promoters  a  suit  for  damages  or  for  an  accounting  for  profits, 
would,  unless  made  as  a  part  of  a  compromise,  and  based  upon 
some  valuable  consideration,  be  beyond  the  authority  of  the  di- 
rectors and  of  no  effect. 

The  question  of  ratification  by  a  majority  of  the  stockholders 
also  necessitates  a  consideration  of  the  difference  between  the 
situation  which  exists  at  the  time  of  the  original  transaction,  and 
the  situation  which  exists  when  a  subsequent  ratification  is  asked. 
Each  subscriber  is,  when  he  comes  into  the  corporation,  entitled  to 
know  what  he  is  buying  and,  with  full  knowledge  of  the  promoters' 

79.  See  post,  chapter  IX.  24  Am.  &  Eng.  Corp.  Gas.  1 ;  Bur- 

80.  See   Simons  v.   Vulcan  Oil  &      bank  v.  Dennis,  101  Cal.  90,  101,  35 
Min.  Co.,  61  Pa.  202,  221,  100  Am.      Pac.  444,  448. 

Dec.  628.  Cited  in  Pittsburg  Mining  81.  See  Lagunas  Nitrate  Co.  v. 
Co.  v.  Spooner,  74  Wis.  307,  321,  42  Lagunas  Syndicate,  1899,  2  Ch.  Div. 
N.  W.  259,  262,  17  Am.  St.  Rep.  149,  392,  464. 


LAWFUL  PROFITS.  231 

\ 
personal   interest,   to   decide   whether  he  will   subscribe   for  the 

shares.  The  acquiescence  of  less  than  the  entire  body  of  the 
subscribers  is  at  such  time  not  binding  upon  the  minority, 
nor  upon  the  corporation.  If  the  corporation  finds  itself  the 
owner  of  property  sold  to  it  by  the  promoters  without  a  suffi- 
cient disclosure  of  their  individual  interest,  it  has,  as  already 
stated,  an  election  to  rescind  the  transaction  in  toto,  to  keep  the 
property  and  sue  the  promoters  for  damages,  or,  under  some 
circumstances,  to  sue  for  an  accounting  for  secret  profits. 
Which  of  these  remedies  is  to  be  pursued  is  a  question  of  in- 
ternal management  upon  which  the  vote  of  the  majority  of  the 
stockholders  is,  in  the  absence  of  fraud,  controlling.82  Their 
determination  to  retain  the  property  is  undoubtedly  binding  upon, 
the  minority  of  the  stockholders,  but  the  majority  have  not,  any 
more  than  has  the  board  of  directors,  power  to  surrender  without 
consideration  the  company's  claim  for  damages,  or  its  right  to  an 
accounting  for  promoters'  profits.83 

82.  See  Urner  v.  Sollenberger,  89  poration  to  sue  the  promoters  for 

Md.  316,  336,  43  Atl.  810;  Stanley  v.  damages,   or  'for  an  accounting  for 

Luse,  36  Or.  25,  58  Pac.  75 ;  Erlanger  their  secret  profits,  see  In  re  Cape 

v.  New  Sombrero  Phosphate  Co.,  L.  Breton  Co.,  L.  R.  29  Ch.  Div.  795, 

R.  3  App.  Cas.   1218,  1281,  6  Eng.  811-812,  disapproved  on  this  point 

Rul.  Cas.  777,  39  L.  T.  N.  S.  269,  27  on  appeal  to  the  House  of  Lords,  L. 

Weekly  Rep.  65;  In  re  Cape  Breton  R.  12  App.  Cas.  652,  665,  (sub  nom. 

Co.,  L.  R.  29  Ch.  Div.  795,  803,  af-  Bentinck  v.  Fenn). 
firming,  In  re  Cape  Breton  Co.,  L.  R.          83.  See  Pollitz  v.  Wabash  R.  R. 

26  Ch.  Div.  221,  and  aflirmed,  Hub  Co.,  207  N.  Y.  113,  127,  100  N.  E.  721, 

nom.  Bentinck  v.  Fenn,  L.  R.  12  App.  citing  Continental  Securities  Co.  v. 

Cas.  652;  Atwool  v.  Merry  weather,  Belmont,  206  N.  Y.  7,  18,  99  N.  E. 

L.  R.  5  Eq.  464n,  37  L.  J.  Ch.  N.  S.  138,  51  L.  R.  A.  N.   S.  112,  Am.  & 

35 ;  Cook  on  Corporations,  ( 7th  ed. ) ,  Eng.    Ann.    Cas.,    1914A,    777,    and 

§    730.     The    mere    fact    that    the  other  cases.     See  also  Continental 

owners  of  a  majority  of  the  stock  Securities  Co.  v.  Belmont,  83  N.  Y. 

were  known  to  favor  the  transaction  Misc.  340,  356,  144  Supp.  801,  811, 

complained  of  does  not  amount  to  a  aflirmed,   168  N.   Y.  App.   Div.  483, 

ratification     thereof.       Stanley     v.  154  Supp.  54  ;  Stanley  v.  Luse,  36  Or. 

Luse,  36  Or.  25,  58  Pac.  75.  25,  35,  58  Pac.  75,  78. 

As  to  the  effect  of  an  election  not         See  ante,  §  110, 
to  rescind,  on  the  right  of  the  cor- 


232  THB  LAW  OF  PROMOTERS. 

The  rule,  therefore,  seems  to  be  that  either  the  stockholders  by 
a  majority  vote,  or  the  board  of  directors,  .may  decide  for  the 
corporation,  to  affirm  or  disaffirm  its  purchase  from  the  promoters, 
but  that  the  company's  rights  of  action  based  upon  an  affirmance 
can  be  surrendered  only  by  the  unanimous  vote  of  all  the  stock- 
holders. 

While  the  law  seems  to  be  that  the  powers  of  the  majority  of 
the  stockholders  and  of  the  board  of  directors  are  co-extensive  as 
to  the  matter  under  consideration,  it  is  no  doubt  better  practice 
to  leave  the  question  of  the  course  to  be  pursued  by  the  corpora- 
tion, to  a  vote  of  the  stockholders  rather  than  to  the  action  of  the 
board  of  directors. 

A  query  suggests  itself  as  to  the  right  of  the  interested  pro- 
moters to  vote  their  shares  upon  the  question  of  the  ratification  of 
their  own  transaction.  They  may,  according  to  the  weight  of 
authority,  do  so  in  the  absence  of  actual  fraud  in  the  transac- 
tion.84 

§  120.  Profits  where  promoters  themselves  the  sole  subscribers. 
It  is  now  established  by  an  almost  unbroken  line  of  decisions, 

84.  Maine. — Camden  Land  Co.  v.  cited  in  note. 

Lewis,  101  Me.  78,  101,  63  Atl.  523,          United  Kingdom  and   Colonies. — 

532-533,  and  cases  cited.  N.  W.  Transportation  Co.  v.  Beatty, 

Minnesota. — Bjorngaard  v.   Good-  L.  R.   12  App.  Cas.  589;   Dominion 

hue  County  Bank,  49  Minn.  483,  52  Cotton    Mills   Co.,    Ltd.,    v.    Amyot, 

N.  W.  48.  1912  App.  Cas.  546,  553. 

New  fork. — Gamble  v.  Queens  Co.          See    Cook   on   Corporations    (7th 

Water  Co.,  123  N.  Y.  91,  25  N.  E.  ed.),  §  652  and  662;  Thompson  on 

201,  9  L.  R.  A.  527;  Continental  Ins.  Corporations,  (2nd  ed.),  §  2043  and 

Co.  v.  N.  Y.  &  H.  R.  R.  Co.,  103  App.  §  4467 ;  Clark  and  Marshall  on  Cor- 

Div.  282,  297,  93  Supp.  28,  affirmed,  porations,  §  634  and  §  653-O. 
187  N.  Y.  225,  79  N.  E.  1026.  Cf.  Atwool  v.  Merryweather,  L.  R. 

Oregon.— Stanley  v.  Luse,  36  Or.  5  Eq.  464n,  37  L.  J.  Ch.  N.  S.  35; 

25,  34-35,  58  Pac.  75.  Mason  v.  Harris,  L.  R.  11  Ch.  Div. 

Pennsylvania. — Russell    v.    Henry  97 ;  McNulta  v.  Corn  Belt  Bank,  164 

C.  Patterson  Co.,  232  Pa.  113,  81  Atl.  111.  427,  449,  45  N.  E.  954,  56  Am. 

136,  36  L.  R.  A.  N.  S.  199,  and  cases  St.  Rep.  203. 


LAWFUL  PROFITS. 


233 


that  if  the  promoters  themselves  take  the  entire  share  capital  o!? 
the  corporation  and  then  sell  the  shares  to  outside  parties,  there 
is  no  fraud  upon  the  corporation,  and  no  basis  of  complaint  by  it, 
no  matter  what  profits  the  promoters  may  derive  from  the  trans- 
action.85 There  is,  it  is  said,  no  fraud  upon  the  corporation,  ncr 


85.  Federal. — Stratton's  Indepen- 
dence, Ltd.,  v.  Dines,  126  Fed.  Rep. 
968,  affirmed,  135  Fed.  Rep.  449,  68 
C.  C.  A.  161.  Petition  for  writ  of 
certiorari  denied,  197  U.  S.  623,  25 
Sup.  Ct.  800,  49  L.  Ed.  911;  Foster 
v.  Seymour,  23  Fed.  Rep.  65 ;  Lang- 
don  v.  Fogg,  18  Fed.  Rep.  5. 

California. — Turner  v.  Markham, 
155  Cal.  562,  571,  102  Pac.  272 ;  Cali- 
fornia-Calaveras  Mining  Co.  v. 
Walls,  —  Cal.  — ,  149  Pac.  595. 

Kansas. — St.  Louis  Ft.  S.  &  W.  R. 
Co.  v.  Tiernan,  37  Kan.  606,  633- 
634,  15  Pac.  544,  559-560. 

Maryland. — Tompkins  v.  Sperry, 
Jones  &  Co.,  96  Md.  560,  54  Atl.  254. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  325,  74  N.  E.  653,  108 
Am.  St.  Rep.  479 ;  same  v.  same,  203 
Mass.  159,  185,  190,  89  N.  E.  193,  40 
L.  R.  A.  N.  S.  314;  Stratton  Mass. 
Gold  Mines  Co.  v.  Stratton,  206 
Mass.  117,  92  N.  E.  34. 

Missouri. — Rrooker  v.  William  H. 
Thompson  Trust  Co.,  254  Mo.  125, 
158-159,  162  S.  W.  187,  195,  et  seq. 

New  Jersey. — Arnold  v.  Searing, 
73  N.  J.  Eq.  262,  67  Atl.  831 ;  same 
v.  same,  78  N.  J.  Eq.  146,  78  Atl.  762. 

New  York.— Blum  v.  Whitney,  185 
N.  Y.  232,  77  N.  E.  1159,  reargument 
denied,  185  N.  Y.  620,  78  N.  E.  1099 ; 
Hutchinson  v.  Simpson,  92  App.  Div. 
382,  87  Supp.  369;  Seymour  v. 
Spring  Forest  Cemetery  Association, 


144  N.  Y.  333,  39  N.  E.  365,  26  L.  R. 
A.  859 ;  Insurance  Press  v.  Montauk 
Wire  Co.,  83  App.  Div.  259,  82  Sup;?. 
104,  affirmed,  178  N.  Y.  623,  70  N.  E. 
1100:  same  v.  same,  103  App.  Div. 
472,  93  Supp.  134 ;  Watkins  v.  Mills, 
114  App.  Div.  903,  100  Supp.  1143, 
(the  facts  of  this  case  are  stated  in 
§  127,  post)  ;  Flanagan  v.  Lyon,  54 
Misc.  372,  105  Supp.  1049;  Parsons 
v.  Hayes,  50  N.  Y.  Super.  29,  14  Abb. 
N.  C.  419;  Schlesinger  v.  Fisk,  60 
Misc.  442,  113  Supp.  578;  Langdon 
v.  Fogg,  14  Abb.  N.  C.  435. 

Washington. — Inland  Nursery  & 
Floral  Co.  v.  Rice,  57  Wash.  67,  ^06 
Pac.  499.  See  also  Gold  Ridge  Min. 
&  Dev.  Co.  v.  Rice,  77  Wash.  384,  137 
Pac.  1001. 

United  Kingdom  and  Colonies. — 
In  re  Ambrose  Lake  Tin  &  Copper 
Mining  Co.,  L.  R.  14  Ch.  Div.  390; 
In  re  Gold  Co.,  L.  R.  11  Ch.  Div.  701, 
48  L.  J.  Ch.  281. 

See  note  to  Lomita  Land  s  Water 
Co.  v.  Robinson,  18  L.  R.  A.  N.  S. 
1116-1119. 

Contra  Society  for  Illustration  of 
Practical  Knowledge  v.  Abbott,  2 
Beav.  559,  (1840),  (followed  in  Min- 
ister of  Rys.  &  Canals  v.  Quebec 
South.  Ry.  Co.,  (1908),l2Exch.  Rep. 
of  Can.  11,  23,  and  cited  in  Re 
Darby,  1911,  1  K.  B.  95.  103,  80  L. 
J.  K.  B.  Div.  ISO)  ;  Nott  *.  Clews,  14 
Abb.  N.  C.  (N.  Y.)  437. 

In  Eureka  Min.  Sin.  &  Power  Co. 


234 


THE  LAW  OF  PROMOTERS. 


upon  any  one,  in  the  original  transaction,  for  there  is  in  effect  a, 
mere  change  of  form,  the  promoters  receiving  the  share  certifi- 
cates in  the  place  of  the  property  transferred  to  the  corpora- 
tion,86 and  the  value  of  the  property  transferred  to  the  company 
is  the  exact  measure  of  the  value  of  the  shares  received  in  pay- 
ment therefor.  The  par  value  of  the  shares  issued  in  payment 
may  greatly  exceed  the  value  of  the  property  transferred  to  the 
corporation,  but  the  amount  by  which  the  property  transferred 
falls  short  of  the  par  value  of  the  shares  will  be  exactly  repre- 
sented by  the  difference  between  the  par  and  the  actual  value  of 
the  stock.87 


v.  Lively,  59  Wash.  550,  110  Pac. 
425,  the  promoters  after  issuing  to 
themselves  the  entire  capital  stock 
of  the  company  in  payment  for  cer- 
tain mining  claims  and  water  rights, 
contributed  a  large  part  of  these 
shares  to  the  treasury  of  the  cor- 
poration. When  these  treasury 
shares  were  sold,  the  promoters  ap- 
plied the  proceeds  to  the  repayment 
Of  the  small  sum  that  they  had 
paid  for  the  mining  claims  and 
water  rights.  This  diversion  of  the 
proceeds  of  the  sale  of  the  treasury 
stock  was  held  to  be  a  fraud. 

86.  Higgins  v.  Lansingh,  154  111. 
301,  332,  40  N.  E.  362,  369 ;  St.  Louis 
Ft.  S.  &  W.  R.  Co.  v.  Tiernan,  37 
Kan.  606,  633-635,  15  Pac.  544,  559- 
560;  Tompkins  v.  Sperry,  Jones  & 
Co.,  96  Md.  560,  580,  581,  54  Atl. 
254,  257,  258;  Insurance  Press  v. 
Montauk  Wire  Company,  103  N.  Y. 
App.  Div.  472,  475-476,  478,  93  Supp. 
134 ;  Hood  v.  Eden,  36  Can.  Sup.  Ct. 
476,  485. 

The  vendors  being  the  owners  of 
all  the  stock  are  considered  in 
equity  to  be  the  company  itself. 


M'Cracken  v.  Robison,  57  Fed.  Rep. 
375,  377,  6  C.  C.  A.  400,  14  U.  S. 
App.  602 ;  Tompkins  v.  Sperry,  Jones 
&  Co.,  96  Md.  560,  583,  54  Atl.  254. 

The  courts  in  such  case  look 
through  the  form  of  the  corporation, 
and,  treating  the  stockholders  as  the 
corporation,  make  "  an  exception  to 
the  otherwise  firmly  established 
universal  rule  that  the  corporation 
is  a  separate  legal  entity  for  all 
purposes."  Old  Dominion  Copper, 
etc.,  Co.  v.  Bigelow,  203  Mass.  159, 
191-192,  89  N.  E.  193,  40  L.  R.  A.  N. 
S.  314 ;  Seymour  v.  Spring  Forest 
Cemetery  Association,  144  N.  Y.  333, 
340,  39  N.  E.  365,  26  L.  R.  A.  859. 

The  fact  that  the  promoters  were 
not  the  actual  owners  of  the  prop- 
erty, but  only  controlled  it  by  means 
of  options,  is  immaterial.  Hut- 
chinson  v.  Simpson,  92  N.  Y.  App. 
Div.  382,  392,  87  Supp.  369. 

87.  Federal. — Foster  v.  Seymour, 
23  Fed.  Rep.  65 ;  Stewart  v.  St.  Louis 
Ft.  S.  &  W.  R.  Co.,  41  Fed.  Rep. 
736,  738;  Stratton's  Independence, 
Ltd.,  v.  Dines,  135  Fed.  Rep.  449, 
68  C.  C.  A.  161,  affirming,  126  Fed. 


LAWFUL  PROFITS. 


235 


If  there  is  any  fraud  in  a  subsequent  sale  of  the  shares  the  cause 
of  action  arising  therefrom  is  personal  to  the  purchasers.     The 
matter  is  one  between  these  purchasers  and  their  vendor,  and  no 
cause  of  action  results  to  the  corporation  therefrom.88 
§  121.  The  same  subject. — Basis  of  the  rule. 

The  basis  of  the  rule  stated  in  the  preceding  section  is,  in  its 
final  analysis,  the  fundamental  one  that  the  promoters'  profits 
are  lawful  if  disclosed  to  all  the  subscribers,  and  acquiesced  in  by 
them.89  There  is,  when  all  the  shares  are  issued  to  the  promoters, 


Rep.  968,  petition  for  writ  of  certi- 
orari  denied,  197  U.  S.  623,  25  Sup. 
Ct.  800,  49  L.  Ed.  911. 

California. — Turner  v.  Markham, 
155  Gal.  562,  571,  102  Pac.  272. 

Illinois. — Higgins  v.  Lansingh,  154 
111.  301,  330,  40  N.  E.  362,  368. 

New  York. — Seymour  v.  Spring 
Forest  Cemetery  Association,  144  N. 
Y.  333,  340-344,  39  N.  E.  365,  26  L. 
R.  A.  859. 

United  Kingdom  and  Colonies. — 
In  re  Ambrose  Lake  Tin  &  Copper 
Mining  Co.,  L.  R.  14  Ch.  Div.  390, 
394,  397. 

88.  Federal. — Foster  v.  Seymour, 
23  Fed.  Rep.  65,  67 ;  Stratton's  Inde- 
pendence, Ltd.,  v.  Dines,  135  Fed. 
Rep.  449,  68  C.  C.  A.  161,  affirming, 
126  Fed.  Rep.  968,  petition  for  writ 
of  certiorari  denied,  197  U.  S.  623, 
25  Sup.  Ct.  800,  49  L.  Ed.  911 ;  Flag- 
ler  Engraving  Co.  v.  Flagler,  19  Fed. 
Rep.  468. 

California. — Garretson  v.  Pacific 
Crude  Oil  Co.,  146  Cal.  184,  189,  79 
Pac.  838,  840. 

Maryland. — Tompkins  v.  Sperry, 
Jones  &  Co.,  96  Md.  560,  581,  583,  54 
Atl.  254,  258. 

New  Jersey. — Arnold  v.  Searing, 
73  N.  J.  Eq.  262,  265,  67  Atl.  831. 


New  York. — Parsons  v.  Hayes,  50 
N.  Y.  Super.  29,  14  Abb.  N.  C.  419, 
434-435;  Langdon  v.  Fogg,  14  Abb. 
N.  C.  435,  436. 

United  Kingdom  and  Colonies. — 
In  re  Ambrose  Lake  Tin  &  Copper 
Mining  Co.,  L.  R.  14  Ch.  Div.  390, 
399;  In  re  Gold  Co.,  L.  R.  11  Ch. 
Div.  701,  713,  48  L.  J.  Ch.  281. 

If  the  promoters  represent  to  the 
purchasers  that  the  shares  sold  are 
treasury  stock,  the  promoters  are 
not,  in  a  suit  by  the  corporation, 
estopped  from  contradicting  such 
representation,  and  the  cause  of 
complaint  lies  in  the  deceived  pur- 
chasers and  not  in  the  corporation. 
Turner  v.  Markham,  155  Cal.  562, 
575,  102  Pac.  272. 

89.  Federal. — Foster  v.  Seymour, 
23  Fed.  Rep.  65. 

Illinois. — Higgins  v.  Lansingh,  154 
111.  301,  331,  40  N.  E.  362,  368. 

Maryland. — Tompkins  v.  Sperry, 
Jones  &  Co.,  96  Md.  560,  580,  54  Atl. 
254. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  325,  74  N.  E.  653,  108  Am. 
St.  Rep.  479;  same  v.  same,  203 
Mass.  159,  192,  89  N.  E.  193,  40  L. 
R.  A.  N.  S.  314. 


236 


THE  LAW  OF  PROMOTERS. 


no  one  to  complain,  for  all  the  original  subscribers  are  parties 
to,  and  have  full  knowledge  of,  the  transaction.  All  subsequent 
holders  receive  their  shares  directly  or  indirectly  from  the  pro- 
moters, stand  in  their  shoes,  and  are  bound  by  their  acquiescence.90 
It  is  also  said  that  the  consent  of  the  holders  of  the  entire  capital 
stock  binds  the  corporation.91 

The  theory  that  the  transaction  amounts  to  a  mere  change  in 
the  form  of  property  is  not  always  a  satisfactory  explanation  of 
the  rule  that  the  corporation  cannot  complain  of  the  promoters' 
profits  if  all  the  shares  are  first  issued  to  the  promoters  and  by 
them  resold  to  the  public.  If  different  properties  were  conveyed 


New  York. — Seymour  v.  Spring 
Forest  Cemetery  Association,  144 
N.  Y.  333,  340,  39  N.  E.  365,  26  L.  R. 
A.  859 ;  Barr  v.  N.  Y.  L.  E.  &  W.  R. 
R.  Co.,  125  N.  Y.  263,  272-273,  26 
N.  E.  145,  34  St.  Rep.  743;  Parsons 
v.  Hayes,  50  N.  Y.  Super.  29,  14  Abb. 
N.  C.  419,  434. 

United  Kingdom  and  Colonies. — 
In  re  Ambrose  Lake  Tin  &  Copper 
Mining  Co.,  L.  R.  14  Ch.  Div.  390, 
395,  399;  Salomon  v.  Salomon,  1897, 
App.  Cas.  22,  33  57,  75  L.  T.  N.  S. 
426,  reversing,  Broderip  v.  Salomon, 
1895,  2  Ch.  Div.  323;  In  re  British 
Seamless  Paper  Box  Co.,  L.  R.  17 
Ch.  Div.  467,  477-478;  Attorney 
General  for  Canada  v.  Standard 
Trust  Co.  of  N.  Y.,  1911,  App.  Cas. 
498,  504. 

90.  Mason  v.  Carrothers,  105  Me. 
392,  399,  405-407,  74  Atl.  1030,  1033, 
1036. 

Old  Dominion  Copper,  etc.,  Co.  v 
Bigelow,  188  Mass.  315,  325,  74  N. 
E.  653,  108  Am.  St.  Rep.  479. 

Parsons  v.  Hayes,  50  N.  Y.  Super. 
29,  39-40,  14  Abb.  N.  C.  419,  433- 
435;  Langdon  v.  Fogg,  14  Abb.  N. 


C.  435,  and  cases  cited. 

In  re  Gold  Co.,  L.  R.  11  Ch.  Div. 
701,  713,  48  L.  J.  Ch.  281,  and  see 
Salomons  v.  British  Gold  Fields  of 
West  Africa,  Ltd.,  12  Times  Law 
Rep.  172. 

91.  Federal. — Foster  v.  Seymour, 
23  Fed.  Rep.  65,  67. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  325,  74  N.  E.  653,  108  Am. 
St.  Rep.  479. 

New  Jersey. — Arnold  v.  Searing. 
73  N.  J.  Eq.  262,  265,  67  Atl.  831; 
Breslin  v.  Fries-Breslin  Co.,  70  N. 
J.  Law  274,  281-282,  58  Atl.  313, 
316. 

New  fork. — Parsons  v.  Hayes,  50 
N.  Y.  Super.  29,  40,  14  Abb.  N.  C. 
419,  434;  Barr  v.  N.  Y.  L.  E.  &  W. 
R.  R.  Co.,  125  N.  Y.  263,  273,  26  N. 
E.  145,  34  St.  Rep.  743. 

Pennsylvania. — Penn.  Tack  Works 
v.  Sowers,  2  Walk.  416. 

United  Kingdom  and  Colonies. — 
Salomon  v.  Salomon,  1897,  App. 
Cas.  22,  33,  36-37,  57,  75  L.  T.  N.  S. 
426,  reversing,  Broderip  v.  Salomon, 
1895,  2  Ch.  Div.  323. 


LAWFUL  PROFITS.  237 

to  the  corporation  by  each  of  several  promoters,  each  'promoter 
taking  an  agreed  portion  of  the  shares  in  payment,  or  if  one  of 
the  promoters  received  his  shares  for  services,  or  for  cash,  or 
without  consideration,  or  if  the  promoters  for  any  reason  agreed 
that  the  shares  of  the  company  were  not  to  be  issued  to  them  in 
the  exact  proportion  of  their  respective  interests  in  the  proper- 
ties conveyed,  there  would  be  something  more  than  a  mere  change 
in  the  form  of  the  investment,  but  no  cause  of  complaint  would 
result  to  the  corporation  provided  that  the  entire  share  capital 
were  divided  among  the  promoters.92  It  is  best  to  base  the  rule 
that  there  is  no  fraud  upon  the  corporation  where  the  promoters 
themselves  take  the  entire  share  capital,  upon  the  knowledge  and 
acquiescence  of  all  the  subscribers  to  the  shares. 

It  may  also  be  said  that  where  the  promoters  are  themselves 
the  sole  subscribers  there  is  no  fiduciary  relation.93 

The  rule  that  there  is  no  cause  of  complaint  in  the  corpora- 
tion if  the  promoters  buy  property  and  resell  it  to  the  corpora- 
tion at  a  profit,  where  the  promoters  themselves  take  the  entire 
issue  of  stock  and  then  sell  the  shares  to  innocent  purchasers, 
while  not  difficult  to  sustain  from  a  theoretical  standpoint,  rests 
upon  no  substantial  practical  ground  of  distinction  from  the  rule 
that  the  promoters  cannot  lawfully  take  a  profit  from  their  deal- 
ings with  the  corporation  without  a  full  disclosure  to  all  subse- 
quent subscribers  for  the  corporate  shares.  The  rule  that  the 
profit  is  lawful  in  the  one  case  but  unlawful  in  the  other,  makes 
the  legal  liability,  as  well  as  the  honesty  of  the  promoters,  depend 
upon  the  form  of  the  transaction  rather  than  its  substance,  and 
has  led  the  courts  into  a  hopeless  labyrinth  of  confusion.94 

92.  See    Brooker    v.    William    H.  Y.  App.  Div.  382,  398,  87  Supp.  369; 
Thompson  Trust  Co.,  254  Mo.  125,  Blum  v.  Whitney,  185  N.  Y.  232,  242, 
162  S.  W.  187.  77  N.   E.   1159,  reargument  denied, 

93.  Tompkins  v.  Sperry,  Jones  &  185  N.  Y.  620,  78  N.  E.  1099. 

Co.,  96  Md.  560,  583,  54  Atl.  254,         94.  For  the  views  of  the  author, 
258 ;  Hutchinson  v.  Simpson,  92  N.      see  post,  §  130. 


238  THE  LAW  OF  PROMOTERS. 

§  122.  The  same  subject. — Dummy  stockholders. 

The  rule  that  the  promoters  cannot  be  liable  because  of  their 
transactions  with  the  corporation  if  the  promoters  themselves 
comprise  all  the  subscribers  or  if  all  the  subscribers  are  fully  cog- 
nizant of  the  facts,  has  obviously  no  application  if  there  is  a 
single  bona  fide  shareholder  of  the  company  who  is  neither  a 
party  to  the  transaction  nor  chargeable  with  knowledge  thereof. 
A  failure  to  disclose  the  transaction  to  nominal  stockholders 
who  hold  their  shares  as  dummies  for  the  promoters,  or  for  others 
fully  aware  of  the  facts,  is  of  no  moment.95 

§  123.  The   same   subject. — Effect  of   permoters'    contract  to 

sell  shares. 

A  question  of  some  interest,  but  one  which  there  is  little  diffi- 
culty in  deciding  on  principle,  arises  in  regard  to  the  effect  upon 
the  transaction,  of  the  circumstance  that  the  vendor  promoters 
had,  before  transferring  their  property  to  the  corporation  and 
receiving  its  shares  in  payment,  already  formed  a  syndicate  to  pur- 
chase the  shares,  or  entered  into  contracts  for  the  sale  thereof  to 
innocent  outside  parties.  The  actual  buyers  and  sellers  of  the 
property  are  in  such  case  not  the  same.  There  is  not  an  assent 
of  all  the  stockholders  and  a  secret  profit  or  interest  of  the  pro- 
moters constitutes  a  fraud  upon  the  corporation.96 

95.  M'Oacken  v.  Robison,  57  Fed.  Land  Co.  v.  Lewis,  101  Me.  78,  88, 

Rep.  375,  377,  6  C.  C.  A.  400,  14  U.  63  Atl.  523,  527. 

S.,  App.  602;  Old  Dominion  Copper,  Schlesinger  v.  Fisk,  60  N.  Y.  Misc. 

etc.,  Co.  v.  Lewisohn,  136  Fed.  Rep.  442,  113  Supp.  578. 

915,  148  Fed.  Rep.  1020,  79  C.  C.  A.  In  re  Ambrose  Lake  Tin  &  Cop- 

534,  210  U.  S.  206,  28  Sup.  Ct.  634,  per  Mining  Co.,  L.  R.  14  Ch.  Div. 

52    L.    Ed.    1025;    Stratton's    Inde-  390,  399. 

pendence,   Ltd.,   v.   Dines,   135  Fed.  96.  There   is    little   authority   on 

Rep.  449,  68  C.  C.  A.  161,  affirming,  this   question.     In   addition   to  the 

126  Fed.  Rep.  968,  petition  for  writ  cases  discussed  in  the  text,  see  Cali- 

of  certiorari  denied,  197  U.  S.  623,  fornia-Calaveras     Mining     Co.      v. 

25  Sup.  Ct.  800,  49  L.  Ed.  911.  Walls,  —  CaZ.  — ,  149  Pac.  595,  the 

Mason  v.  Carrothers,  105  Me.  392,  salient  facts  of  which  are  set  forth 

399,    74    Atl.    1030,    1033;    Camden  in  §  127,  infra.    The  court  said  at 


LAWFUL  PROFITS. 


239 


In  Arnold  v.  Searing,97  the  defendants,  having  procured  options 
to  purchase  the  entire  capital  stock  of  the  Passaic  Rolling  Mill 
Company  at  a  cost  of  $1,400,000,  became  promoters  of  the  Passaic 
Steel  Company,  to  which  they  sold  the  assets  of  the  Rolling  Mill 
Company  at  $1,900,000.  The  money  which  was  used  to  pay  for 
the  stock  of  the  Rolling  Mill  Company  was  raised  by  means  of 
a  syndicate,  which  subscribed  the  sum  of  $1,900,000,  the  mem- 
bers of  the  syndicate  ultimately  receiving  the  shares  of  the  new 
company  for  the  money  so  subscribed.  The  court  said,  "  The 
principle  that  a  corporation  cannot  complain  of  a  transaction  to 


page  602  that  the  stock,  while  nomi- 
nally issued  to  the  promoter,  was 
in  reality  acquired  by  him  to  a  large 
extent  for  the  benefit  of  his  asso- 
ciates as  intended  stockholders. 
The  court  seems  to  lay  greater 
stress  upon  the  fact  that  some  of 
the  stock  issued  to  the  promoter  was 
to  be  returned  to  the  corporation 
as  treasury  stock  to  be  sold  to 
future  stockholders,  than  upon  the 
fact  that  a  large  part  of  the  stock 
had,  in  practical  effect,  already 
been  sold  to  the  innocent  associates 
of  the  promoter. 

See  also  Brewster  v.  Hatch,  122 
N.  Y.  349,  25  N.  E.  505,  33  St.  Rep. 
527,  where  the  point  under  dis- 
cussion was  not  raised,  and  the 
plaintiffs  elected  on  the  trial  to  re- 
cover their  personal  damages  in- 
stead of  pressing  their  suit  on  behalf 
of  the  corporation.  See  also  Davis 
v.  Las  Ovas  Co.,  227  U.  S.  80,  33 
Sup.  Ct.  197,  57  L.  Ed.  426.  See  also 
Bigelow  v.  Old  Dominion  Copper 
Mining,  etc.,  Co.,  74  N.  J.  Eq.  457, 
502,  71  Atl.  153,  which  cannot,  how- 
ever, be  presumed  to  add  anything 
to  what  was  decided  in  Arnold  v. 


Searing  (discussed  in  the  text) 
which  it  cites.  Fred  Macey  Co.  v. 
Macey,  143  Mich.  138,  152-153,  106 
N.  W.  722,  727,  5  L.  R.  A.  N.  S.  1036, 
may  have  some  bearing  on  the  ques- 
tion, but  in  that  case  the  purchasers 
had  reason  to  believe  that  they 
were  obtaining  their  shares  by  sub- 
scription directly  from  the  company. 
Hitchcock  v.  Hustace,  14  Hawaii 
232,  may  be  authority  for  the  rule 
that  the  promoters  stand  in  a  fidu- 
ciary relation  if  they  have  before 
the  consummation  of  the  transaction 
contracted  to  sell  some  of  their 
shares.  In  Hutchinson  v.  Simpson, 
92  N.  Y.  App.  Div.  382,  87  Supp.  369, 
there  was,  as  pointed  out  by  the 
court  nothing  to  indicate  that  the 
agreement  for  the  sale  of  shares  had 
been  signed  by  any  of  the  parties 
before  the  contract  for  the  transfer 
of  the  malting  plants  and  the  issue 
of  the  entire  capital  in  payment 
therefor,  was  made.  (See  opinion, 
pp.  396-397). 

97.  73  N.  J.  Eq.  262,  265-266,  67 
Atl.  831.  See  also  Arnold  v.  Sear- 
ing, 78  N.  J.  Eq.  146,  159,  78  AtL 
762,  767. 


240  THB  LAW  OF  PROMOTERS. 

which  all  of  its  stockholders  assent,  necessarily  embodies  the  idea 
that  the  assent  is  upon  the  part  of  the  real  parties  in  interest. 
One  who  in  fact,  though  not  in  form,  occupies  the  position  of  a 
non-assenting  stockholder  should  not  on  any  theory  of  unanimous 
consent  be  barred  the  assertion  of  his  rights  as  such.  The  real 
relation  of  the  complainants  to  the  new  corporation  at  the  time 
of  the  merger  is,  in  my  judgment,  dependent  upon  an  accurate 
conception  of  the  syndicate  agreement  already  briefly  referred 
to.  If  that  agreement  was,  in  effect,  a  mere  engagement  upon  the 
part  of  the  defendants  to  sell  to  the  syndicate  members  certain 
stock  of  a  proposed  corporation  to  be  capitalized  in  a  defined 
manner,  any  injuries  sustained  by  the  syndicate  members  by  rea- 
son of  misrepresentations  upon  the  part  of  the  defendants  touch- 
ing the  cost  or  value  of  the  assets  which  the  proposed  corporation 
was  to  own,  might  well  be  urged  as  injuries  purely  personal  to 
the  persons  to  whom  the  false  representations  were  made,  as 
distinguished  from  injuries  to  the  collective  rights  of  stock- 
holders, and  that  such  false  representations  could  not  be  made 
the  basis  of  a  suit  of  this  nature.  But  the  syndicate  transaction, 
as  defined  by  the  bill,  embodied  other  essential  elements.  The 
money  supplied  by  the  syndicate  contributors  was  not  money  for 
the  purchase  of  stock  from  defendants,  but  was  the  money  with 
which  the  assets  of  the  old  company  were  to  be  acquired  by  the 
new.  It  was  the  money  which  was,  in  effect,  to  form  the  capital 
of  the  new  company  with  which  it  was  to  acquire  the  assets  of  the 
old.  Defendants  were  not  selling  to  the  syndicate  members  any- 
thing which  they  owned  or  were  to  own.  The  so-called  syndicate 
were  merely  an  aggregation  of  persons  whom  defendants  induced 
to  supply  these  funds  for  the  purpose  named.  The  *  syndicate 
shares  '  referred  to  by  the  bill,  as  sold  by  defendants  to  the  sev- 
eral syndicate  members,  simply  represented  the  proportionate 
parts  which  the  several  syndicate  members  were  to  own  in  the 
aggregate  amount  of  stock  and  bonds  of  the  new  company,  capital- 
ized on  the  basis  proposed,  which  was  to  go  to  the  syndicate  mem- 


LAWFUL  PROFITS.  241 

bers.  In  selling  syndicate  shares  defendants  were,  in  effect,  so- 
liciting contributions  to  the  capital  of  the  new  company.  They 
were  in  no  sense  vendors  or  parties  to  a  contract  of  sale.  While 
the  members  of  the  syndicate  did  not  sign  any  formal  subscription 
for  the  stock  of  the  new  company,  and  may  not  have  received  their 
stock  directly  from  the  new  company,  they  in  fact  supplied  the 
money  which  was  to  form  the  capital  of  the  new  company  with 
which  it  was  to  acquire  the  assets  of  the  old  and  on  which  its 
stock  issue  was  to  be  based.  The  method  in  which  this  was  to  be 
accomplished  was  entrusted  by  the  syndicate  members  to  defend- 
ants. Under  these  conditions  the  members  of  the  syndicate  must 
be  regarded  as  equitably  the  original  subscribers  for  this  stock  to 
essentially  the  same  extent  as  though  the  transaction  had  con- 
sisted of  formal  stock  subscriptions  by  the  several  syndicate 
members.  The  syndicate  members  thus  became  the  real  parties  in 
interest.  They  were,  in  substance,  the  stockholders,  even  though 
the  transaction  was  managed  in  such  manner  and  took  such  form 
that  at  the  time  of  the  consolidation  of  the  two  companies  the 
syndicate  members  did  not  appear  on  the  face  of  the  transaction 
as  parties  in  interest."  The  court  seems  to  imply  that  if  the 
money  of  the  syndicate  had  not  been  used  to  buy  the  property 
transferred  to  the  company,  the  promoters'  profits  would  have 
been  lawful ;  that  is,  that  promoters  who  have,  before  the  organ- 
ization of  the  company  and  the  transfer  to  it  of  the  property 
which  it  is  organized  to  acquire,  entered  into  contracts  with  out- 
side parties  for  the  sale  of  shares,  can  thereafter  transfer  their 
property  to  the  corporation  at  a  grossly  exaggerated  price  pro- 
vided only  that  they  take  the  entire  share  capital  of  the  company 
in  payment  therefor.  Such  a  rule  should  not  be  followed.  It 
could  not  in  such  a  case  be  said  that  all  parties  had  knowledge  of 
the  transaction,  for  while  the  promoters  would  constitute  the 
whole  body  of  subscribers  and  all  the  record  owners  of  shares, 
the  parties  who  had  contracted  with  the  promoters  for  the  pur- 
chase of  shares  would  be  the  equitable  owners  thereof.  It  cannot 


242  THE  LAW  OF  PROMOTERS. 

be  said  that  the  transaction  constitutes  a  mere  change  of  form,  for 
the  property  transferred  belonged  to  the  promoters,  while  the 
shares  issued  in  payment  therefor  belong  in  equity  to  their 
vendees.  It  cannot  fairly  be  said  that  the  value  of  the  property 
transferred  is  the  exact  measure  of  the  value  of  the  shares  issued 
therefor,  for  the  value  of  the  shares  is,  to  some  extent  at  least, 
established  by  the  contracts  for  the  sale  thereof. 

In  Pittsburg  Mining  Co.  v.  Spooner,98  the  court  said  that 
whether  any  action  for  fraud  could  have  been  maintained  by  the 
corporation  had  the  defendants  issued  fully  paid  stock  to  them- 
selves in  payment  for  their  property  need  not  be  determined,  as 
it  appeared  that  "  no  sale  to  or  purchase  by  the  corporation  was 
made  until  all  the  stock,  or  nearly  all,  had  been  agreed  to  be  taken 
by  other  parties  than  the  defendants." 

In  Tompkins  v.  Sperry  Jones  &  Co.,"  the  defendants  Sperry 
and  Jones  formed  a  combination  of  certain  breweries  in  the  city 
of  Baltimore.  At  least  one  of  these  breweries  was  purchased 
by  Sperry  and  Jones  under  a  contract  to  pay  therefor  partly  in 
the  shares  of  the  consolidated  company.  The  company  was 
formed  and  the  breweries  transferred  to  it.  The  company  after- 
wards went  into  the  hands  of  receivers  who  brought  suit  against 
Sperry  and  Jones  to  recover  the  profits  made  by  them  upon  the 
promotion.  The  court  said  that  Sperry  and  Jones  were  at  the 
time  of  the  transfer  of  the  breweries  the  owners  of  all  the  stock 
of  the  new  corporation,  that  the  transaction  constituted  a  mere 
change  in  the  form  of  property  owned  by  Sperry  and  Jones  "  from 
individual  estate  to  corporate  securities  "  and  was  not  unlawful. 
The  court  in  this  case  apparently  lost  sight  of  the  fact  that 
Sperry  and  Jones  acquired  at  least  one  of  the  breweries  under  a 
contract  to  pay  therefor  in  the  shares  of  the  corporation  to  be 
formed.  The  vendor  under  this  contract,  therefore,  became  the 
equitable  owner  of  shares  at,  or  even  before,  the  time  that  the 

98.  74   Wis.   307,   322-324,   42   N.      24  Am.  &  Eng.  Corp.  Cas.  1. 
W.  259,  262,  17   Am.   St.  Rep.   149,          99.  96  Md.  560,  54  Atl.  254. 


LAWFUL  PROFITS.  243 

promoters  agreed  to  convey  his  brewery  to  the  corporation.  The 
organization  of  the  corporation,  and  the  transfer  of  the  breweries 
to  it,  constituted  something  more  than  a  mere  change  in  the  form 
of  the  investment  and  any  profit  gained  by  the  promoters,  was 
gained  at  the  expense  of  those  who  accepted  payment  for  their 
breweries  in  shares. 

The  question  as  to  the  effect  on  the  legality  of  the  promoters' 
transaction  with  the  corporation,  of  an  existing  syndicate  to  take 
the  company's  shares,  arose  under  a  somewhat  unusual  aspect  in 
the  litigations  resulting  from  the  organization  of  the  Old 
Dominion  Copper,  etc.,  Company,  in  which  the  Supreme  Court 
of  the  United  States  and  the  Supreme  Court  of  Massachusetts 
arrived  at  opposite  conclusions.  It  appeared  in  these  litigations 
that  Leonard  Lewisohn  of  New  York  and  Albert  S.  Bigelow  of 
Massachusetts  evolved  a  plan  of  organizing  a  new  corporation  to 
take  over  the  properties  of  the  Old  Dominion  Copper  Company  of 
Baltimore  and  certain  mining  rights  and  lands  which  then  stood 
in  the  name  of  one  Keyser  in  trust  for  the  stockholders  of  the 
existing  company.  A  syndicate  was  formed  to  carry  out  this 
plan.  The  syndicate  acquired  the  stock  of  the  Baltimore  com- 
pany and  Bigelow  and  Lewisohn  individually  acquired  the  prop- 
erty standing  in  the  name  of  Keyser.  The  new  corporation  was 
organized  under  the  name  of  Old  Dominion  Copper  Mining  and 
Smelting  Company,  with  a  capital  of  $3,750,000,  divided  into 
150,000  shares  of  a  par  value  of  $25.00  each.  One  hundred 
thousand  shares  were  issued  for  the  properties  of  the  old  corpo- 
ration, of  which  about  eighty  thousand  shares  were  distributed 
among  the  members  of  the  syndicate  and  the  balance  retained  by 
Bigelow  and  Lewisohn.  Thirty  thousand  shares  were  issued  for 
the  properties  formerly  held  in  the  name  of  Keyser.  The  remain- 
ing twenty  thousand  shares  were  later  sold  at  par  by  public  sub- 
scription. The  syndicate  paid  for  the  properties  of  the  old  cor- 
poration the  sum  of  $1,000,000  and  received  therefor  $2,000,000 
in  shares.  It  was  claimed  that  Lewisohn  and  Bigelow  had  held 


244  THE  LAW  OF  PROMOTERS. 

out  to  the  subscribers  of  the  syndicate  that  the  new  corporation 
would  be  capitalized  at  $2,500,000,  of  which  $2,000,000  was  to 
be  paid  to  the  syndicate  for  the  Baltimore  properties,  and  that 
the  remaining  $500,000  was  to  be  sold  to  furnish  working  capital, 
and  that  Bigelow  and  Lewisohn  were  guilty  of  fraud  in  capital- 
izing the  corporation  at  $3,750,000  and  retaining  for  themselves, 
without  the  knowledge  of  the  members  of  the  syndicate,  the  differ- 
ence of  $1,250,000  in  shares.  The  new  corporation  subsequently 
brought  suit  against  Bigelow  in  Massachusetts,  and  against 
Lewisohn  in  the  United  States  Circuit  Court  for  the  Southern 
District  of  New  York.  The  Supreme  Court  of  Massachusetts 
in  the  suit  against  Bigelow  said,1  "  They  (the  subscribers)  were 
sharers  thus  in  the  profit  of  $1,000,000  above  the  costs  of 
mines.  But  they  were  also  entitled  to  disclosure  of  the  secret 
profit  of  $1,250,000  more  taken  by  the  defendant  and  Lewisohn 
and  it  is  found  that  most  of  them  were  ignorant  of  it.  Respecting 
any  sale  to  the  plaintiff  in  which  they  had  agreed  to  become 
shareowners  on  any  other  basis  than  that  of  two  for  one,  they 
were  entitled  to  disclosure.  This  is  quite  aside  from  any  rights 
they  may  have  had  against  Bigelow  for  not  treating  them  fairly 
on  the  division  of  profits.  It  stands  on  different  ground.  In  that 
relation,  they  were  sharers  in  promoters'  profits  and  they  received 
what  they  expected.  But  they  had  also  agreed  to  be  subscribers 
to  stock  of  the  plaintiff.  In  that  character  they  were  not  promot- 
ers, but  stockholders  and  entitled  to  all  their  rights.  That  they 
knew  there  was  to  be  a  sale  for  $2,000,000  and  a  profit  of  two  for 
one  was  no  reasonable  ground  for  expectation  that  the  defendant 
would  take  a  large  additional  secret  profit.  As  to  this  secret 
profit,  the  members  of  the  syndicate  had  the  same  rights  as  the 
outside  public,  that  is,  they  were  entitled  to  a  disclosure  to  an 
independent  and  impartial  board  of  officers  who  should  be  in  po- 
sition to  act  for  the  interests  of  the  corporation,  as  opposed  to 

1.  203  Mass.  159,  199-200,  89  N.  E.  193,  40  L.  B.  A.  N.  S.  314. 


LAWFUL  PROFITS.  245 

those  of  the  promoters.  In  this  regard  the  case  is  like  Arnold  v. 
Searing,  (supra),  where  the  defendants  were  held  liable." 

The  Supreme  Court  of  the  United  States,  considering  the  same 
transaction  in  the  action  against  Lewisohn  2  said,  "  The  syndi- 
cate was  a  party  to  the  scheme  to  make  a  profit  out  of  the  corpo- 
ration. Whether  or  not  there  was  a  subordinate  fraud  committed 
by  Bigelow  and  Lewisohn  on  the  agreement  with  them,  as  the 
petitioner  believes,  is  immaterial  to  the  corporation.  The  issue 
of  the  stock  was  apparent,  we  presume,  on  the  books,  so  that  it 
is  difficult  to  suppose  that  at  least  some  members  of  the  syndicate, 
representing  an  adverse  interest,  did  not  know  what  was  done. 
But  all  the  members  were  engaged  in  the  plan  of  buying  for 
less  and  selling  to  the  corporation  for  more,  and  were  subject  to 
whatever  equity  the  corporation  has  against  Bigelow  and  the 
estate  of  Lewisohn.  There  was  some  argument  to  the  contrary, 
but  this  seems  to  us  the  fair  meaning  of  the  bill.  Bigelow  and 
Lewisohn,  it  is  true,  divided  the  stock  received  for  the  real  estate 
now  in  question.  But  that  was  a  matter  between  them  and  the 
syndicate." 

The  situation  was  in  these  Old  Dominion  Copper  Company  liti- 
gations quite  different  from  that  which  existed  in  any  of  the 
other  cases  discussed  in  this  section.  Bigelow  and  Lewisohn  and 
the  syndicate  organized  by  them  acquired  the  properties  sold  to 
the  new  corporation  before  any  fiduciary  relation  to  the  corpo- 
ration arose.3  The  interest  of  the  promoters  in  this  property  was 
fully  disclosed  to  the  subscribers,  at  least  no  contention  to  the 
contrary  seems  to  have  been  made.  The  price  paid  for  these 
properties  was  presumably  known  to  each  member  of  the  Syndi- 
cate, who  comprised  all  the  persons  interested  at  the  time,  and 

2.  Old  Dominion  Copper,  etc.,  Co.  U.  S.  613,  33  Sup.  Ct.  772,  57  L.  Ed. 

v.  Lewisohn,  210  U.  S.  206,  214,  28  1352),  distinguished  In  Davis  v.  Las 

Sup.  Ct.  634,  52  L.   Ed.  1025,    (see  Ovas  Co.,  227  U.  S.  80,  33  Sup.  Ct 

also  195  Fed.  637,  affirmed,  202  Fed.  197,  57  L.  Ed.  426. 
178,  writ  of  certiorari  denied,  229         3.  203  Mass.  202,  210  U.  S.  210. 


246  THE  LAW  OF  PROMOTERS. 

the  concealment  of  such  price  would,  in  any  event,  under  the 
circumstances,  have  constituted  no  fraud  upon  the  corporation.4 
The  matter  complained  of  was  that  the  promoters,  having  stated 
to  the  members  of  the  syndicate  that  the  corporation  should  be 
capitalized  at  $2,500,000  and  that  $2,000,000  of  its  shares  should 
be  issued  for  the  property,  capitalized  the  corporation  at  $3,750,- 
000,  issued  $3,250,000  for  the  properties,  and  retained  for  them- 
selves shares  of  the  par  value  of  $1,250,000.  The  ground  of  com- 
plaint, if  there  was  any,  was  that  this  $1,250,000  of  additional 
shares  should  have  been  distributed  among  the  members  of  the 
syndicate  pro  rata.  The  fraud,  if  there  was  any,  was  a  fraud 
upon  the  members  of  the  syndicate  individually,  and  not  upon 
the  corporation. 

§  124.  Legality  of  promoters'  profits  where  shares  are  subse- 
quently sold  by  subscription. 

A  distinction  between  a  transaction  in  which  a  promoter  con- 
veys his  property  to  the  corporation  taking  the  entire  share 
capital  in  payment  and  then  proceeds  to  sell  shares  to  the  public, 
and  a  transaction  in  which  a  promoter,  at  a  time  when  no  one  else 
has  acquired  an  interest  in  the  corporation,  transfers  his  prop- 
erty to  it  taking  in  payment  a  part  of  its  share  capital  and  then 
causes  additional  shares  to  be  issued  by  the  corporation  to  orig- 
inal subscribers,  was,  until  the  recent  decision  of  the  Federal 
courts  in  the  litigations  arising  out  of  the  organization  of  the  Old 
Dominion  Copper  Company,5  recognized  by  an  almost  unbroken 
line  of  authorities.6  The  distinction  rested  upon  the  theory  that 

4.  See  ante,  §  115.  W.  629,  632,  119  Am.  St.  R.  564. 

5.  See  post,  §§  128-130.  Maine. — Mason  v.  Carrothers,  105 

6.  California. — California-Gala-  Me.   392,   399,   404,   et   seq.,   74   Atl. 
veras  Mining  Co.  v.  Walls,  —  Cal.  — ,  1030,  1033,  1035-1036 ;  Camden  Land 
149  Pac.  595.     Cf.  Garretson  v.  Pa-  Co.  v.  Lewis,  101  Me.  78,  95,  63  Atl. 
ciflc  Crude  Oil  Co.,  146  Cal.  184,  79  523,  530. 

Pac.  838.  Massachusetts. — Hayward  v.  Lee- 

lowa. — Hinkley  v.  Sac  Oil  &  Pipe      son,  176  Mass.  310,  319-320,  57  N.  E. 

Line  Co.,  132  Iowa  396,  403,  107  N.      656,  49  L.  R.  A.  725;  Old  Dominion 


LAWFUL  PROFITS. 


247 


the  acquiescence  of  all  existing  shareholders  is  not  binding  upon 
the  corporation  if  the  bringing  in  of  further  shareholders  is  con- 
templated. If  the  promoters  themselves  take  all  the  shares  of 
the  corporation  their  participation  in  the  transaction  binds 
the  subsequent  transferees  of  their  shares  and  the  corporation 
itself,  but,  it  was  held  that  if  the  promoters  take  only  a  part  of 


Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  74  N.  E.  653,  108  Am.  St. 
Rep.  479;  same  v.  same,  203  Mass. 
159,  89  N.  E.  193,  40  L.  R.  A.  N.  S. 
314,  where  the  cases  are  reviewed  at 
length. 

New  Jersey. — Plaquemines  Tropi- 
cal Fruit  Co.  v.  Buck,  52  N.  J.  Eq. 
219,  232-233,  27  Atl.  1094,  44  Am. 
&  Eng.  Corp.  Gas.  686;  Groel  v. 
United  Electric  Co.  of  N.  J.,  70  N. 
J.  Eq.  616,  622,  61  Atl.  1061;  Bige- 
low v.  Old  Dominion  Copper,  etc., 
Co.,  74  N.  J.  Eq.  457,  71  Atl.  153; 
Arnold  v.  Searing,  73  N.  J.  Eq.  262, 
67  Atl.  831;  same  v.  same,  78  N.  J. 
Eq.  146,  78  Atl.  762. 

New  York. — Hutchinson  v.  Simp- 
son, 92  App.  Div.  382,  400-401,  87 
Supp.  369. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  96  Pac.  528. 

Pennsylvania. — Bailey  v.  Pitts- 
burg  &  C.  G.  C.  &  C.  Co.,  69  Pa.  334. 

Virginia. — Richlands  Oil  ,  Co.  v. 
Morriss,  108  Va.  288,  61  S.  E.  762. 

Washington. — Mangold  v.  Adrian 
Irrigation  Co.,  60  Wash.  286,  290, 
111  Pac.  173,  175. 

Wisconsin. — Pietsch  v.  Milbrath, 
123  Wis.  647,  657,  et  seq.,  101  N.  W. 
388,  391-392,  102  N.  W.  342,  68  L.  R. 
A.  945,  107  Am.  St.  Rep.  1017 ;  Pitts- 
burg  Mining  Co.  v.  Spponer,  74  Wis. 
307,  321,  42  N.  W.  259,  262,  17  Am. 


St.  Rep.  149,  24  Am.  &  Eng.  Corp. 
Gas.  1. 

United  Kingdom  and  Colonies. — 
Lagunas  Nitrate  Co.  v.  Lagunas 
Syndicate,  1899,  2  Ch.  Div.  392,  427- 
428,  440-441;  In  re  Olympia,  Ltd., 
1898,  2  Ch.  Div.  153,  169-170,  174- 
175,  affirmed,  sub  nom.  Gluckstein 
v.  Barnes,  1900,  App.  Gas.  240 ;  In  re 
British  Seamless  Paper  Box  Co.,  L. 
R.  17  Ch.  Div.  467,  471,  477 ;  Lon- 
don Trust  Co.  v.  Mackenzie,  62  L. 
J.  Ch.  N.  S.  870,  875;  In  re  Leeds  & 
Hanley  Theatres  of  Varieties,  1902, 
2  Ch.  Div.  809,  824;  Dictum  of 
Vaughan  Williams,  J.,  in  Broderip 
v.  Salomon,  1895,  2  Ch.  Div.  323, 
329,  reversed,  sub  nom.  Salomon  v.. 
Salomon  1897,  App.  Gas.  22,  75  L.  T.. 
N.  S.  426,  where  this  point  is,  how- 
ever, left  open,  (see  p.  37) ;  Bennett 
v.  Havelock  El.  L.  &  P.  Co.,  16  Ont, 
Week  Rep.  19 ;  Minister  of  Railways 
&  Canals  v.  Quebec  So.  Ry.  Co.,  12 
Exch.  Rep.  of  Can.  11. 

See  also  cases  cited,  ante  §  14, 
note  58. 

See,  however,  the  article  by  Pro- 
fessor Little  in  5  111.  Law.  Rev.  87. 

As  to  the  rights  of  future  pur- 
chasers of  lots  from  a  cemetery  as- 
sociation, see  Campbell  v.  Cypress 
Hills  Cemetery,  41  N.  Y.  34,  41; 
Bliss  v.  Linden  Cemetery  Ass'n,  83 
N.  J.  Eq.  494,  91  Atl.  304. 


248  THE  LAW  OF  PROMOTERS. 

( 

the  share  capital,  allowing  further  shares  to  be  issued  to  other 
subscribers,  the  acquiescence  of  the  promoters  binds  neither  the 
future  subscribers  nor  the  corporation.  The  merits  of  this  very 
technical  distinction  are  discussed  in  a  subsequent  section.7 

§  125.  Effect  of  subsequent  issue  not  contemplated  at  time 
of  original  transaction. 

It  has  been  held  that  when  the  promoters  themselves  receive  in 
payment  for  their  property  the  entire  issue  of  shares  then  contem- 
plated, a  change  of  plan  and  the  subsequent  issue  of  further 
shares  to  other  subscribers,  does  not  affect  the  original  trans- 
action or  render  the  promoters'  profits  unlawful. 

The  British  Seamless  Paper  Box  Co.  was  organized  with  a 
capital  of  £50,000,  of  which  £32,000  was  issued  to  the  promoters 
for  patent  rights  and  cash.  The  transaction  was  closed  on  the 
15th  of  April,  1875.  No  prospectus  was  issued  by  the  company, 
nor  did  the  original  members  invite  any  other  persons  to  take 
shares,  and  there  was  at  the  time  no  intention  that  any  shares 
should  be  sold  to  other  persons.  It  became  necessary,  a  year  or 
so  later,  to  raise  further  capital,  and  a  few  additional  shares 
were  issued  and  sold  for  cash.  Cotton,  L.  J.  said,  that  "  the  di- 
rectors of  a  company  formed  in  the  ordinary  way,  stand  in  a  fidu- 
ciary relation  not  only  to  those  who  are  members  at  the  time, 
but  to  all  who  may  come  in  afterwards.  But  here  it  is  an  estab- 
lished fact  that  when  the  company  was  formed,  it  was  intended 
to  be  a  private  company,  that  is,  it  was  intended  to  carry  it  on 
without  calling  in  the  public,  or  issuing  any  shares  except  to 
the  then  existing  shareholders.  Therefore  the  doctrine  that  di- 
rectors may  not  make  a  profit  for  themselves  is  inapplicable,  be- 
cause all  the  members  knew  that  they  intended  to  make  a  profit. 
It  is  true  that  some  new  members  were  subsequently  taken  in.  If, 
shortly  after  this  transaction,  a  prospectus  had  been  issued  and 
the  public  had  been  invited  to  come  in  and  take  shares,  no  court 

7.  See  post,  §  130. 


LAWFUL  PROFITS.  249 

would  have  listened  to  directors  who  said  that  it  was  not  intended 
to  take  in  fresh  members.    But  this  was  commenced  and  carried  on 
entirely  as  a  private  company,  and  considerable  time  elapsed  be- 
fore they  asked  any  one  to  join  them." 

§  126.  Effect  of  unsuccessful  attempt  to  sell  shares  by  sub- 
scription. 

The  Postage  Stamp  Automatic  Delivery  Co.,  having  gone  into 
voluntary  liquidation,  the  liquidator  brought  suit  to  compel  the 
defendant  directors  to  account  for  certain  shares  given  them  by 
the  vendor  in  consideration  of  their  acting  as  directors.  No 
persons  other  than  the  original  parties,  who  had  full  knowledge, 
appear  to  have  become  interested  as  stockholders.  A  prospectus 
was  issued,  but  the  public  did  not  take  any  shares.  The  court 
held,  citing  In  re  British  Seamless  Paper  Box  Co.,9  that  the  issue 
of  a  prospectus  making  no  mention  of  the  agreement  between  the 
vendor  and  the  directors,  showed  an  intention  to  defraud  future 
allottees,  and  that  the  defendants  would  have  to  account  for  their 
shares,  apparently  holding  that  where  the  issue  of  shares  to  fu- 
ture subscribers  was  contemplated  the  profits  were  fraudulent 
although  no  outside  parties  ever  actually  came  in.10  The  correct- 
ness of  this  decision  may  well  be  questioned. 


8.  In  re  British  Seamless  Paper  company  is  formed  as  a  private 
Box  Co.,  L.  R.  17  Ch.  Div.  467,  479,  company  under  the  statute,  the  in- 
distinguished  but  approved  in  Old  tention  throughout  is  to  bring  in  out- 
Dominion  Copper,  etc.,  Co.  v.  Bige-  side  cash  shareholders,  the  situation 
low,  188  Mass.  315,  326,  74  N.  E.  appears  to  me  identical  in  essentials 
653,  108  Am.  St.  Rep.  479;  same  v.  with  one  in  which  the  company  is 
same,  203  Mass.  159,  186,  190-191,  an  ordinary  public  company."  Om- 
89  N.  E.  193,  40  L.  R.  A.  N.  S.  314,  nium  Electric  Palaces  Lim.  v. 
also  in  London  Trust  Co.  v.  Mac-  Baines,  1914,  1  Ch.  Div.  332,  347- 
kenzie,  62  L.  J.  Ch.  N.  S.  870,  875.  348,  82  L.  J.  Ch.  N.  S.  519,  527,  109 
Compare  also,  Felix  Hadley  &  Co.,  L.  T.  N.  S.  206. 
Ltd.,  v.  Hadley,  77  L.  T.  N.  S.  131.  9.  See  note  8,  supra. 

"  Where,     as     here,     though    the  10.  1892,  3  Ch.  Div.  566,  576. 


250  THE  LAW  OF  PROMOTERS. 

§  127.  Effect  of  subsequent  sale  of  shares  donated  to  the  treas- 
ury by  the  promoters. 

A  question  which  suggests  itself,  and  upon  which  the  decisions 
throw  but  little  light,  is  that  arising  out  of  the  not  uncommon 
practise  of  the  promoters  returning  to  the  treasury  to  be  sold 
for  the  benefit  of  the  company,  some  of  the  shares  taken  in  pay- 
ment for  their  properties.  The  question  is  whether  the  purchasers 
of  these  shares  are  to  be  considered  as  purchasing  indirectly  from 
the  promoters,  or  as  original  subscribers  for  the  company's  shares ; 
that  is,  whether  the  case  falls  within  the  rule  tha£  the  promoters' 
transaction  with  the  corporation  cannot  be  questioned  if  they 
themselves  take  the  entire  issue  of  shares,  or  within  the  rule,  no 
longer  uniformly  accepted,  that  the  promoters'  profits  are  unlaw- 
ful if  concealed  from  subscribers  who  are  subsequently,  but  as 
a  part  of  the  original  scheme,  brought  into  the  corporation. 

In  Calif ornia-Calaveras  Mining  Co.  v.  Walls,11  one,  Manson, 
knowing  that  certain  mining  property  in  California  could  be  pur- 
chased for  $120,000,  sought  the  co-operation  of  certain  persons 
in  Chicago  in  the  purchase  thereof,  representing  to  these  persons 
that  he  had  a  verbal  option  for  the  purchase  of  the  property  at 
$250,000.  Some  of  the  Chicago  parties  wanted  to  visit  the  prop- 
erty, but  Manson  protested  against  their  doing  so,  stating  that 
if  the  owner  learned  that  Eastern  parties  were  trying  to  purchase 
the  property  she  would  raise  the  price.  The  Chicago  parties 
thereupon  agreed  to  co-operate  with  Manson  in  the  purchase  of 
the  property,  and  it  was  determined  that  a  corporation  should 
be  formed  for  that  purpose,  and  that  the  Chicago  parties  would 
finance  the  corporation  by  purchasing,  or  causing  to  be  pur- 
chased, so  much  of  its  stock  as  would  be  necessary  to  place  funds 
in  the  treasury  of  the  corporation  to  pa.y  certain  promissory 
notes  to  be  issued  by  it.  It  was  agreed  that  the  corporation 
should  have  a  capital  stock  of  $2,500,000  divided  into  500,000 
shares  of  the  par  value  of  $5.00  each;  that  upon  its  organization, 
11.  —  Cal.  — ,  149  Pac.  595. 


LAWFUL  PROFITS.  251 

Manson  was  to  transfer  the  mining  property  to  it,  and  receive  its 
entire  capital  stock,  and  three  notes  for  $100,000  each;  that  of 
the  500,000  shares  of  capital  stock,  Manson  was  to  transfer  to 
the  treasury  150,000  shares  as  a  fund  for  future  use  by  the  cor- 
poration, and  199,965  shares  to  a  trustee  for  distribution  among 
the  parties  as  set  out  in  the  agreement.  The  remaining  150,000 
shares  Manson  was  to  turn  in  to  the  treasury  to  be  re-issued  to 
one  Brown  as  trustee  and  sold  for  the  benefit  of  the  corporation. 
Manson  organized  the  plaintiff  corporation,  purchased  the  min- 
ing property  for  $120,000  and  conveyed  one-half  of  it  to  the 
corporation,  receiving  all  of  its  capital  stock  in  payment.  He 
then  conveyed  to  the  corporation  the  other  half  of  the  prop- 
erty, delivered  to  it  as  treasury  stock  300,000  of  its  shares,  and  re- 
ceived from  it  three  promissory  notes  for  $100,000  each.  Brown 
as  trustee  of  the  treasury  stock  obtained  from  various  persons 
who  had  subscribed  therefor,  the  sum  of  $90,000,  the  larger  part 
of  which  was  subscribed  by  the  Chicago  parties.  This  $90,000 
with  $10,000  subscribed  by  Manson  was  used  to  take  up  the  first 
note.  The  second  note  was  paid  with  moneys  received  from 
the  Chicago  parties  and  other  purchasers  of  treasury  stock. 
Before  the  third  note  was  paid  the  stockholders  discovered 
the  truth  in  regard  to  the  price  paid  for  the  property 
by  Manson,  and  brought  suit.  The  defendants  contended 
that  when  the  transactions  between  Manson  and  the  cor- 
poration were  consummated,  there  were  no  stockholders  save 
Manson  himself,  and  that  no  fraud  was  practised  upon  the  corpo- 
ration ;  that  as  far  as  the  Chicago  parties  were  concerned,  they, 
as  purchasers  of  stock  subsequent  to  the  transaction  complained 
of,  might  have  a  right  of  action  against  Manson,  but  that  this 
was  their  individual  remedy,  and  that  under  the  numerous  author- 
ities which  they  cited  12  no  cause  of  action  accrued  to  the  corpo- 

12.  They  relied,  among  other  Copper  Mining  Co.  v.  Lewisohn.  210 
cases,  on  Parsons  v.  Hayes,  14  Abb.  U.  S.  206,  28  Sup.  Ct.  634,  52  L. 
N.  C.  (N.  Y.)  419;  Old  Dominion  Ed.  1025;  Stratton's  Independence, 


252  THE  LAW  OF  PROMOTERS. 

ration.  The  court  said  that  the  cases  cited  had  no  application  to 
the  state  of  facts  before  it.  That  it  was  by  the  agreement  of  the 
parties  contemplated  "  that  treasury  stock  to  the  amount  of 
150,000  shares  should  be  issued  to  Brown  as  trustee  of  the  cor- 
poration, to  be  sold  to  third  parties  for  the  benefit  of  the  corpo- 
ration at  prices  and  terms  set  out  in  the  contract,  and  another 
150,000  shares  were  to  be  held  by  the  corporation  as  a  fund  for 
its  future  use,  which,  of  course,  involved  a  right  in  the  corpora- 
tion to  sell  it  to  future  stockholders.  There  were  then  150,000 
corporate  shares  which  the  agreement  expressly  provided  should 
be  sold  to  constitute  future  stockholders  in  the  corporation,  and 
150,000  shares  additional  subject  to  sale  for  such  purpose,  an 
aggregate  of  300,000  shares,  or  three-fifths  of  the  capital  stock 
of  the  corporation.  Brown  actually  did  sell  a  very  large  portion 
of  this  treasury  stock  pursuant  to  the  agreement."  The  court 
apparently  considered  that  the  sale  of  the  treasury  stock  under 
the  circumstances  set  forth,  affected  the  rights  of  the  corpora- 
tion to  the  same  extent  as  though  the  shares  had  been  sold  by 
original  subscription. 

In  Hinkley  v.  Sac  Oil  &  Pipe  Line  Co.,13  the  promoters  trans- 
ferred a  contract  to  the  corporation  in  consideration  of  the  issue 
to  them  of  499,999  shares  of  the  par  value  of  $1.00  each,  the  total 
capital  of  the  company,  on  condition  that  they  turn  back  250,989 
shares  to  be  sold  for  the  benefit  of  the  company  at  such  prices  as 
the  directors  might  elect.  These  shares  were  afterwards  sold  to 
outside  parties.  The  language  of  the  court  indicates  that  it  con- 
sidered the  profit  made  by  the  promoters  upon  the  sale  to  the 
company  a  violation  of  the  rule  against  secret  profits,  but  the 
case  is  of  little  assistance  for  the  reason  that  the  theory  that 

Ltd.,   v.   Dines,   135  Fed.   Rep.   449,  Tompkins   v.   Sperry,   Jones  &  Co., 

68  C.  C.  A.  161 ;  In  re  Ambrose  Lake  96  Md.  560,  54  Atl.  254 ;  Woodbury 

Tin  &  Copper  Mining  Co.,  L.  R.  14  Heights  Land  Co.  v.  Loudenslager, 

Ch.    Div.   390;    Seymour   v.    Spring  55  N.  J.  Eq.  78,  35  Atl.  436. 
Forest   Cemetery   Ass'n,   144   N.   Y.          13.  132  Iowa  396,  107  N.  W.  629, 

333,  39  N.  E.  365,  26  L.  R.  A.  859 ;  119  Am.  St.  R.  564.- 


LAWFUL  PROFITS.  253 

the  transaction  was  lawful  on  the  ground  that  all  stockholders 
held  their  shares  under  the  promoters,  was  not  mentioned  by  the 
court,  and  for  the  further  reason  that  the  action  was  one  for 
the  cancellation  of  the  plaintiffs  shares,  to  which  relief  he  would, 
because  of  affirmative  misrepresentations  made  to  him,  in  any 
event,  have  been  entitled. 

In  Fred  Macey  Co.  v.  Macey,14  the  entire  capital  stock  of  the 
company  was  taken  by  the  promoters  and  $200,000  of  preferred 
stock  immediately  sold  for  the  benefit  of  the  treasury.  The  court, 
referring  to  an  undisclosed  contract  between  the  corporation  and 
one  of  the  promoters  said :  "  The  knowledge  of  this  contract  by 
the  three  promoters  and  subscribers  to  the  capital  stock  did  not 
bind  the  purchasers  of  the  stock  who  had  no  knowledge  thereof. 
The  stock  evidently  was  not  sold  as  their  individual  property,  but 
as  the  stock  of  the  corporation,  the  proceeds  of  which  were  to  be 
paid  into  the  treasury  as  a  working  capital."  It  is,  however,  im-  > 
portant  to  note  that  in  this  case  the  entire  $200,000  of  treasury 
stock  had  been  taken  by  outside  parties  before  the  company 
was  formed. 

In  Mason  v.  Carrothers,15  the  promoters  having  received  in 
payment  for  certain  patents  $100,000  in  the  preferred  and  about 
$800,000  in  the  common  stock  of  the  company,  turned  back  to  the 
treasury  $200,000  of  common  stock,  which  was  afterwards  issued 
as  a  bonus  to  the  subscribers  for  the  remaining  $100,000  of  pre- 
ferred stock.  The  plaintiffs  were  among  these  subscribers,  and 
it  was  claimed  that,  having  received  some  of  the  common  stock  is- 
sued to  the  promoters,  they  must  be  deemed  to  have  acquiesced 
in  all  that  went  before.  The  court  overruled  this  contention,  say- 
ing that  the  plaintiffs  could  not  be  held  to  have  acquiesced  in  a 
transaction  of  which  they  had  no  knowledge. 

It  is  held  in  Turner  v.  Markham  16  that  if  the  shares  were  actu- 

14.  143  Mich.  138,  152,  106  N.  W.    16.  155  Cal.  562,  576,  102  Pac. 
722,  727,  5  L.  R.  A.  N.  S.  1036.       272. 

15.  105  Me.  392,  74  Atl.  1030. 


254  THE  LAW  OF  PROMOTERS. 

ally  taken  by  the  promoters,  and  by  them  sold  to  the  public,  the 
fact  that  the  promoters  falsely  represented  the  shares  sold  by 
them  to  be  treasury  stock,  would  not,  in  an  action  brought  by 
the  corporation,  estop  them  from  showing  the  contrary,  and  that 
any  cause  of  action  arising  from  this  misrepresentation  was  in 
the  deceived  purchasers  and  not  in  the  corporation. 

In  Parsons  v.  Hayes,17  the  complaint  alleged  that  the  com- 
pany had  issued  to  one  of  its  promoters,  one  Catlow,  its  entire 
capital  of  $2,000,000  in  exchange  for  property  not»worth  over 
$150,000,  and  that  Catlow  had  thereupon,  in  pursuance  of  an 
agreement  between  the  parties,  transferred  20,000  shares  of  the 
par  value  of  twenty  dollars  each  to  the  corporation,  and  that 
this  stock  was  thereafter  sold  as  fully  paid  to  innocent  pur- 
chasers. The  plaintiff,  who  purchased  his  shares  in  the  open 
market,  brought  suit  on  behalf  of  the  corporation.  The  court 
said  that  the  plaintiff  held  his  shares  under  Catlow  and  could  not 
maintain  the  action. 

In  Watkins  v.  Mills,18  the  complaint  alleged  that  the  American 
Grass  Twine  Company  had  agreed  with  one  Johnson,  the  agent 
of  the  promoters,  to  issue  to  him  its  entire  capital  stock  of  $15,- 
000,000  upon  his  agreement  to.  procure  the  transfer  to  the  com- 
pany of  the  entire  capital  stock  of  the  Northwestern  Grass  Twine 
Company  amounting  to  $7,500,000  and  to  return  to  the  Ameri- 
can Grass  Twine  Company  $7,500,000  of  its  own  stock,  of  which 
stock  so  returned  $4,000,000  par  value  was  to  be  sold  to  such 
persons  as  could  be  induced  to  subscribe  therefor  at  $32.50  a  share. 
The  plaintiff  brought  suit  on  behalf  of  the  company,  alleging  that 
the  promoters  had  unlawfully  retained  secret  profits.  A  demurrer 
to  the  complaint  was  sustained  at  special  term  and  this  judgment 

17.  50   N.   Y.    Super.  29,   14   Abb.  Y.    App.    Div.    259,    82    Supp.    104, 
N.  C.  419.  affirmed,    178   N.    Y.   623,   70   N.    E. 

18.  114  N.  Y.  App.  Div.  903,  100  1100;  same  v..same,  103  N.  Y.  App. 
Supp.     1148.       See    also    Insurance  Div.  472,  93  Supp.  134. 

Press  v.  Montauk  Wire  Co.,  83  N. 


LAWFUL  PROFITS.  255 

was  affirmed  by  the  Appellate  Division.  The  opinions  do  not 
discuss  the  question  whether  the  purchasers  of  treasury  stock 
were  to  be  considered  original  subscribers,  or  indirect  purchasers 
from  the  promoters.  The  court  at  Special  Term  sustained  the 
demurrer  on  the  authority  of  Hutchinson  v.  Simpson,19  and  Insur- 
ance Press  v.  Montauk  Wire  Co.,20  and  the  Appellate  Division,  on 
the  authority  of  Blum  v.  Whitney.21  Watkins  v.  Mills  might  have 
been  decided  either  on  the  theory  that  though  the  plaintiff  pur- 
chased his  shares  from  the  treasury  of  the  corporation,  he  held 
them  under  the  promoters  to  whom  all  the  shares  were  originally 
issued,  or  upon  the  theory,  since  adopted  by  the  Supreme  Court 
of  the  United  States,22  that  no  action  could  be  maintained  on  be- 
half of  the  corporation,  even  if  the  plaintiff  were  considered  as 
having  acquired  his  shares  by  original  subscription. 

§  128.  The  Old  Dominion  Copper  Company  litigations. 

Some  time  prior  to  March,  1895,  Leonard  Lewisohn  of  New 
York  and  Albert  S.  Bigelow  of  Massachusetts  formed  the  plan  of 
acquiring  and  transferring  to  a  new  corporation  the  properties 
of  the  Old  Dominion  Copper  Company  of  Baltimore,  and  certain 
"  outside  properties  "  of  small  value  then  standing  in  the  name  of 
one  Keyser  for  the  benefit  of  the  stockholders  of  the  Baltimore 
Company.  Lewisohn  and  Bigelow  proceeded  to  purchase  all  the 
stock  of  the  Baltimore  Company,  raising  the  money  necessary  for 
that  purpose  by  means  of  a  syndicate,  the  members  of  which  were, 
if  the  scheme  proved  a  success,  to  get  two  dollars  for  every  dollar 
paid  into  the  syndicate  treasury,  with  the  privilege  of  taking  the 
shares  of  the  new  company  at  par  in  lieu  thereof.  The  stock  of 

19.  92  N.  Y.  App.  Div.  382,  420,  87  reargument  denied,   185  N.   Y.  620, 
Supp.  369.  78  N.  E.  1099. 

20.  103  N.   Y.  App.   Div.  472,  93  22.  Old    Dominion    Copper,    etc., 
Supp.  134.  Co.  v.  Lewisohn,  210  U.   S.  206,  28 

21.  185  N.  Y.  232,  77  N.  E.  1159,  Sup.  Ct.  634,  52  L.  Ed.  1025,  post,  § 

128. 


256  THE  LAW  OF  PROMOTERS. 

the  Baltimore  Company  was  acquired  for  $1,000,000.  The  "  out- 
side properties "  were  conveyed  to  Lewisohn  individually,  ap- 
parently without  additional  consideration.  These  transactions 
were  carried  through  on  July  8th,  1895,  and  on  the  same  day  the 
Old  Dominion  Copper  Mining  &  Smelting  Company  was  organized 
with  a  capital  stock  of  $1,000,  divided  into  forty  shares  of  $25 
each.  The  next  day  the  incorporators  met,  elected  themselves  di- 
rectors, and  increased  the  authorized  capital  stock  to  $3,750,000, 
consisting  of  150,000  shares  of  a  par  value  of  $25  each.  On  July 
llth,  1895,  five  directors  resigned,  and  Lewisohn  and  Bigelow,  to- 
gether with  three  members  of  the  syndicate,  were  appointed  in  their 
places.  A  meeting  was  then  held,  at  which  the  only  directors  pre- 
sent were  Bigelow  and  Lewisohn,  and  two  persons  presumably 
subject  to  their  control.  An  offer  was  thereupon  submitted  on 
behalf  of  Bigelow  to  sell  all  the  property  of  the  Baltimore  Company 
to  the  new  company  for  100,000  shares  of  its  stock,  and  Lewisohn 
offered  to  sell  to  it  the  "  outside  properties  "  for  an  additional  30,- 
000  shares.  Both  offers  were  accepted.  The  remaining  20,000 
shares  of  the  stock  of  the  company  were  thereupon  offered  to  the 
public  at  par,  and  taken  by  subscribers  who  had  no  knowledge 
of  the  profits  made  by  Bigelow,  Lewisohn  or  the  syndicate.  Nearly 
all  the  members  of  the  syndicate  elected  to  take  shares  of  the  new 
company  instead  of  cash,  so  that  of  the  100,000  shares  issued  for 
the  property  of  the  Baltimore  Company,  about  80,000  shares  were 
issued  to  the  syndicate,  and  the  remaining  20,000  shares  divided 
between  Bigelow  and  Lewisohn,  who  also  divided  the  30,000  shares 
received  for  the  outside  properties.  The  company  remained  in  the 
control  of  Bigelow  and  Lewisohn  until  July,  1902.  Thereafter 
investigations  were  made  and  suits  commenced.  Service  could 
apparently  not  be  made  upon  Bigelow  in  New  York,  nor  upon 
Lewisohn  in  Massachusetts.  Actions  were  therefore  commenced 
against  Lewisohn  in  the  United  States  Circuit  Court  for  the  South- 
ern District  of  New  York,  and  against  Bigelow  in  the  Supreme 
Court  of  Massachusetts.  One  suit  against  each  defendant  was 


LAWFUL  PROFITS.  257 

based  upon  the  sale  to  the  company  of  the  property  of  the  Balti- 
more company,  and  another  on  the  sale  of  the  "  outside  proper- 
ties." 

Lewisohn's  demurrer  to  the  complaint  based  upon  the  sale  of  the 
"  outside  properties  "  was  sustained  by  Lacombe,  J.23  upon  the 
theory  that  the  vendors  were  the  sole  stockholders,  citing  Foster 
v.  Seymour,24  and  M'Cracken  v.  Robison,25  and  making  no  refer- 
ence to  any  distinction  between  a  case  where  the  promoter  takes 
the  entire  capital  stock,  and  a  case  where  some  of  the  shares  are 
subsequently  issued  directly  to  innocent  subscribers. 

The  actions  brought  against  Bigelow  came  on  for  hearing  on 
demurrer  before  the  Supreme  Court  of  Massachusetts.  That  court 
overruled  the  demurrers,26  saying,  "  In  both  Foster  v.  Seymour  2T 
and  M'Cracken  v.  Robison 28  *  *  *  *  all  the  capital  stock 
was  issued  to  the  directors  and  promoters  who  made  the  sale  to 
the  corporation  complained  of  in  payment  for  the  property  so 
sold.  In  such  a  case  the  transaction  complained  of  is  acquiesced  in 
not  only  by  all  those  interested  but  by  all  who  it  is  contemplated 
shall  be  interested  in  the  corporation  except  as  third  persons  should 
acquire  the  interest  of  some  one  or  more  of  those  persons.  Such 
third  persons  are  bound  by  the  acquiescence  of  their  vendors,  and 
such  a  corporation  is  bound  by  the  acquiescence  of  all  its  stock- 
holders. See  In  re  Ambrose  Lake  Tin  &  Copper  Mining  Co.29* 
See  also  In  re  Postage  Stamp  Automatic  Delivery  Co.30  It  is 
hardly  necessary  to  point  out  the  difference  between  such  a  case, 
where  the  scheme  of  the  corporate  organization  does  not  con- 
template there  being  any  stockholders  other  than  those  who  buy 
the  stock  issued  in  the  transaction  complained  of,  and  a  case  like 

23.  136  Fed.  Rep.  915.  27.  23  Fed.  Rep.  65. 

24.  23  Fed.  Rep.  65.  28.  57  Fed.  Rep.  375,  6  C.  0.  A. 

25.  57  Fed.  Rep.  375,  6  G.  0.  A.      400,  14  U.  S.  App.  602. 

400,  14  U.  S.  App.  602.  29.  L.  R.  14  Ch.  Div.  300. 

26.  188  Mass.  315,  325,  74  N.  H.         30.  1892,  3  Ch.  Div.  566. 
653,  108  Am.  St.  Rep.  479. 


258  THE  LAW  OF  PROMOTERS. 

that  now  before  us,  where  96,000  out  of  150,000  shares  are  to  be 
issued  to  persons  to  whom  no  disclosure  was  made."  31 

The  Old  Dominion  Copper  Company  amended  its  bill  of  com- 
plaint in  the  suit  against  Lewisohn.  Lewisohn  again  demurred. 
This  demurrer  was  sustained  by  Holt,  J.32  On  appeal  to  the 
Circuit  Court  of  Appeals  33  that  court  affirmed  the  judgment 
below,  saying,  "  At  the  time  of  the  transfer  by  Bigelow  and 
Lewisohn  to  the  company,  Bigelow  and  Lewisohn  and  their  repre- 
sentatives owned  the  entire  issue  of  stock  of  the  corporation.  The 
sale  by  them  to  the  corporation  was  in  effect  a  sale  by  them  to 
Bigelow  and  Lewisohn.  A  corporation  can  only  act  through  the 
human  beings  who  compose  it.  It  cannot  be  deceived  or  defrauded, 
unless  its  stockholders  and  directors  are  deceived  or  defrauded. 
The  corporation  knew  all  that  Bigelow  and  Lewisohn  knew, 
and  no  one  of  the  original  parties  to  the  transfer  was  de- 
frauded by  the  exchange  of  the  stock  controlled  by  Bigelow  and 

Lewisohn  for  the  real  estate  controlled  by  them.34 

It  is  true  that  the  Supreme  Court  of  Massachusetts  35  has  taken  a 
different  view,  but  we  feel  constrained  to  adhere  to  the  prior 
adjudication  of  this  circuit." 

Bigelow's  demurrers  to  the  Massachusetts  suits  having  been 
overruled,  the  cases  were  brought  on  for  trial  and  heard  on  the 
merits  before  Sheldon,  J.,  who  gave  judgment  for  the  plaintiff  in 

31.  The  96,000  shares  referred  to  34.  Citing  Foster  v.  Seymour,  23 
are  made  up  of  the  20,000  taken  up  Fed.  Rep.  65;  M'Cracken  v.  Robison, 
fcy  original  subscription  and  76,000  57  Fed.  Rep.  375,  6  C.  C.  A.  400,  14 
shares  received  by  members  of  the  U.   S.  App.  602;   Barr  v.  N.   Y.  L. 
syndicate  other  than  Bigelow  and  E.  &  W.  R.  R.  Co.,  125  N.  Y.  263,  26 
Lewisohn.  N.  E.  145,  34  St.  Rep.  743;  Blum  v. 

32.  See  148  Fed.  Rep.  1020,  79  C.  Whitney,   185   N.   Y.  232,  77  N.   E. 
C.  A.  534.    See  opinion  of  Hough,  J.,  1159,  reargument  denied,  185  N.  Y. 
in  Old  Dominion  Copper,  etc.,  Co.  v.  620,  78  N.  E.  1099. 

Lewisohn,  195  Fed.  Rep.  637,  638.  35.  Old    Dominion    Copper,    etc., 

33.  148  Fed.  Rep.  1020,  79  C.  O.      Co.  v.  Bigelow,  188  Mass.  315,  74  N. 
A.  634.  E.  653,  108  Am.  St.  Rep.  479. 


LAWFUL  PROFITS.  259 

each  case.36  When  the  cases  were  about  to  be  reached  for  hearing 
before  the  full  court,  Bigelow  filed  a  bill  in  the  New  Jersey 
Chancery  Court,  New  Jersey  being  the  domicile  of  the  corporation, 
asking  for  an  injunction  against  the  prosecution  of  the  Massa- 
chusetts suits,  and  advancing  many  arguments  not  necessary  to  be 
considered  here.  A  preliminary  injunction  was  granted  but  the 
bill  was,  after  a  full  hearing,  dismissed  by  Chancellor  Pitney, 
now  Associate  Justice  of  the  Supreme  Court  of  the  United  States, 
who  held  37  that  there  was  neither  reason  nor  authority  for  his  in- 
terference in  the  premises  but,  evidently  interested  by  the  subject, 
entered  into  an  exhaustive  and  most  helpful  discussion  of  the  law 
of  promoters,  and,  without  definitely  stating  whether  he  agreed 
with  the  view  of  the  Federal  or  of  the  Massachusetts  courts, 
pointed  out  a  slight  difference  in  the  cases,  that  is,  that  the  com- 
plaint in  the  Federal  courts  showed  that  the  transaction  between 
the  promoters  and  the  corporation  was  consummated  before  the 
20,000  shares  were  issued  to  the  public,  while  Judge  Sheldon  had 
found  the  contrary.  This  decision  was  made  on  August  8th,  1908, 
and  on  August  14th,  1908,  the  Massachusetts  court  issued  an  in- 
junction restraining  Bigelow  from  further  prosecuting  his  action 
in  New  Jersey.38 

The  Supreme  Court  of  the  United  States  39  in  the  meantime 
affirmed  the  judgment  of  the  Circuit  Court  of  Appeals  in  the  action 
against  Lewisohn,  on  the  ground  that  at  the  time  of  the  sale 
there  was  no  wrong  done  to  anyone  as  Bigelow,  Lewisohn  and 
their  syndicate  were  on  both  sides  of  the  bargain,  and  that  if  there 
was  any  wrong  done  when  the  innocent  public  subscribed,  the  fraud 
was  upon  the  subscribers  and  not  upon  the  corporation;  that  if 
any  subordinate  fraud  was  committed  by  Bigelow  and  Lewisohn 

38.  203  Mass.  159,  163,  89  N.  E.  38.  203  Mass.  159,  163-164,  89  N. 

193,  40  L.  R.  A.  N.  S.  314.  E.  193,  40  L.  R.  A.  N.  S.  314. 

37.  Bigelow  v.  Old  Dominion  Cop-  39.  210   U.    S.    206,   28    Sup.   Ct 

per,  etc.,  Co.,  74  N.  J.  Eq.  457,  71  634,  52  L.  Ed.  1025. 
Atl.  153. 


260  THE  LAW  OF  PROMOTERS. 

upon  the  members  of  the  syndicate  the  ground  of  complaint  was 
with  the  syndicate  and  not  with  the  corporation;  and  then  re- 
ferring to  the  distinction  made  by  the  Supreme  Court  of  Massa- 
chusetts, said :  "  To  the  lay  mind  it  would  make  little  or  no  differ- 
ence whether  the  20,000  shares  sold  to  the  public  were  sold  on  an 
original  subscription  to  the  articles  of  incorporation  or  were  is- 
sued under  the  scheme  to  some  of  the  syndicate  and  sold  by  them. 
Yet  it  is  admitted,  in  accordance  with  the  decisions,  that  in  the 
latter  case  the  innocent  purchasers  would  have  no  claim  against 
any  one.  If  we  are  to  seek  what  is  called  substantial  justice  in 
disregard  of  even  peremptory  rules  of  law,  it  would  seem  desirable 
to  get  a  rule  that  would  cover  both  of  the  almost  equally  possible 

cases  of  what  it  deemed  a  wrong Of  course  it  is 

competent  for  legislators,  but  not,  we  think,  for  judges,  except  by 
a  quasi-legislative  declaration,  to  establish  that  a  corporation  shall 
not  be  bound  by  its  assent  in  a  transaction  of  this  kind,  when  the 
parties  contemplate  an  invitation  to  the  public  to  come  in  and 
join  as  original  subscribers  for  any  portion  of  the  shares.  It 
may  be  said  that  the  corporation  cannot  be  bound  until  the  con- 
templated adverse  interest  is  represented,  or  it  may  be  said  that 
promoters  cannot  strip  themselves  of  the  character  of  trustees 
until  that  moment.  But  it  seems  to  us  a  strictly  legislative  deter- 
mination. It  is  difficult,  without  inventing  new  and  qualifying  es- 
tablished doctrines,  to  go  behind  the  fact  that  the  corporation 
remains  one  and  the  same  after  once  it  really  exists." 

Bigelow  having  appealed  from  the  judgment  of  Sheldon,  J.,  his 
case  came  on  for  hearing  before  the  full  court.40  Rugg,  J.,  refer- 
ring to  the  decision  of  the  Supreme  Court  of  the  United  States 
said :  "  The  deference  due  to  a  decision  by  the  highest  court  in  the 
land  and  the  intrinsic  importance  of  the  question  at  issue  require 
a  reconsideration  of  our  own  cases,  a  re-examination  of  the  au- 
thorities and  a  careful  consideration  of  the  principles  involved," 

40.  203  Mass.  159,  176,  196,  89  N.  E.  193,  40  L.  R.  A.  N.  S.  314. 


LAWFUL  PROFITS.  261 

but  after  a  most  careful  and  exhaustive  review  of  the  authorities, 
concluded  that  with  great  respect  to  the  decision  in  210  U.  S.  206, 
it  was  "  constrained  to  adhere  to  the  law  as  laid  down  in  the  ear- 
lier cases  in  this  Commonwealth."  The  court  after  deciding  that 
Bigelow  would  have  been  liable  even  if  the  transaction  had  been 
consummated  before  the  20,000  shares  were  issued  to  the  subscrib- 
ers, pointed  out  that  while  the  resolution  to  purchase  the  mines  of 
the  promoter  was  passed  on  July  llth,  1895,  when  only  40  shares 
of  stock  had  been  subscribed  for  or  issued,  the  purchase  was  not 
consummated  until  December,  1895,  and  January,  1896,  when  the 
deeds  were  delivered  to  the  plaintiff;  that  the  certificates  in  pay- 
ment of  these  conveyances  were  issued  on  September  18th,  1895, 
while  the  subscription  list  for  the  20,000  shares  was  dated  July 
18th,  1895,  and  some  of  the  subscriptions  were  paid  at  least  as 
early  as  September  10th.  The  full  court,  by  a  vote  of  four  to 
three,  affirmed  the  judgment  of  Sheldon,  J.,  who  was  himself  one 
of  the  four  judges  voting  for  affirmance. 

The  Old  Dominion  Copper  Company  thereupon  again  turned  its 
attention  to  its  claims  against  Lewisohn.  The  previous  decisions 
of  the  Federal  courts  had  only  disposed  of  the  action  based  upon 
the  acquisition  of  the  "  outside  properties,"  the  action  relating  to 
the  properties  of  the  Maryland  Company  having  remained  quies- 
cent since  its  inception  in  or  about  the  year  1902.  The  bill  of 
complaint  in  that  action  was  then  amended  so  as  to  avoid  stating 
that  the  complainant  had  entered  into  possession  of  the  property 
of  the  Maryland  Company  on  July  12th,  1895,  and  by  inserting  an 
allegation  setting  forth  the  defendants'  original  promise  to  the 
public  to  form  a  corporation  with  a  capital  of  $2,500,000  only, 
and  their  violation  thereof  to  the  defendants'  benefit  and  advan- 
tage. Evidence  having  been  introduced,  the  case  came  on  for  final 
hearing  before  Hough,  J.41  who  held  that  admitting  that  Bigelow 
and  Lewisohn  had  said  to  the  members  of  their  syndicate  that  the 

41.  195  Fed.  Rep.  637. 


262  THE  LAW  OF  PROMOTERS. 

company  in  contemplation  would  be  capitalized  at  $2,500,000, 
there  was  no  evidence  that  such  a  statement  was,  in  respect  to 
any  person,  an  enforceable  legal  obligation.  In  relation  to  the 
amendment  as  to  the  consummation  of  the  transaction  between 
Bigelow,  Lewisohn,  and  the  company,  the  court  held  that  as 
Bigelow  and  Lewisohn,  on  July  12th,  1895,  owned  all  the  stock 
of  the  Maryland  Company,  and  were  also  the  only  shareholders  in 
the  complainant  company,  their  agreement,  made  on  that  day,  to 
transfer  the  property  of  one  company  for  a  certain  number  of 
shares  of  the  other,  constituted  an  enforceable  contract  and  that 
the  transaction  was  then  substantially  consummated,  though  the 
legal  title  was  not  transferred  until  a  later  day.42 

The  decree  dismissing  the  bill  of  complaint  was  affirmed  by  the 
Circuit  Court  of  Appeals  on  the  ground  that  the  suit  relating  to 
the  "  outside  properties  "  was  between  the  same  parties,  related 
to  the  same  breach  of  fiduciary  relation,  involved  the  same  ques- 
tions, and  was  res  adjudicata  of  the  controversy.  Judge  Coxe 
thought  that  the  difference  between  the  facts  before  the  court 
and  the  facts  considered  by  the  Supreme  Court  of  the  United 
States  in  the  suit  relating  to  the  "  outside  properties  "  were  in- 
consequential. Judge  Noyes,  however,  said  that  the  status  of 
the  corporation  in  respect  to  the  presence  of  innocent  interests, 
must  be  determined  as  of  the  time  of  the  consummation  of  the 
transaction ;  that  until  the  promoters  took  something  from  the 
corporation  and  thereby  made  profits  there  were  none  to  be  ac- 
counted for;  that  the  agreement  of  July  remained  executory  until 
the  stock  was  issued  to  the  promoters  in  September,  and  that  until 
then  the  corporation  had  no  cause  of  action  against  them;  that 
when  the  contract  was  so  carried  out  that  the  corporation  had 
ground  of  complaint,  the  interests  of  third  parties  had  become  in- 
volved; that  the  crucial  question  was  not  whether  innocent  inter- 

42.  Garretson    v.    Pacific    Crude      in  point  on  this  question. 
Oil  Co.,  146  Cal.  184,  79  Pac.  838,  is 


LAWFUL  PROFITS.  263 

ests  were  involved  when  the  agreement  was  entered  into,  but 
whether  they  were  involved  when  it  was  carried  out.  Judge  Noyes 
concurred  in  the  affirmance  of  the  judgment  of  the  Circuit  Court 
on  the  ground  that  the  defense  of  a  former  judgment  had  been 
established.43 

The  defendant  Bigelow  appealed  to  the  Supreme  Court  of  the 
United  States,  from  the  judgments  entered  against  him  in  Massa- 
chusetts, claiming  that  the  courts  of  that  state  had  not  given,  to 
the  judgment  of  the  Federal  courts  in  favor  of  Lewisohn,  that  full 
faith  and  credit  required  by  the  Constitution  of  the  United  States. 
This  contention  was  overruled  and  the  judgments  against  Bigelow 
affirmed.44 

The  Old  Dominion  Copper  Company  applied  to  the  Supreme 
Court  of  the  United  States  for  a  writ  of  certiorari  to  the  Circuit 
Court  of  Appeals,  to  review  its  affirmance  of  the  decree  dismissing 
the  amended  bill  of  complaint  in  the  second  action  against  Lewi- 
sohn. This  application  was  denied.45 

§  129.  The  same  subject. — Subsequent  decisions. 

These  Old  Dominion  Copper  Company  litigations  involve  a  fun- 
damental question  which  is  bound  to  arise  in  many  future  litiga- 
tions. Whether  the  decisions  of  the  Federal  courts  or  those  of  the 
Massachusetts  courts  will  be  more  generally  followed,  one  can 
scarcely  hazard  an  opinion. 

Mason  v.  Carrothers  46  was  decided  after  the  decision  of  the  Su- 
preme Court  of  the  United  States  in  the  Lewisohn  case,  and  be- 
tween the  first  and  second  decisions  of  the  Massachusetts  Supreme 
Court  in  the  Bigelow  case.  The  promoters  had  in  Mason  v.  Car- 


43.  Old    Dominion    Copper,    etc.,  Ann.  Cas.,  ]£13  E.  875. 

Co.  v.  Lewisohn,  202  Fed.  Rep.  178,  45.    Old  Dominion  Copper  Co.,  etc., 

120  C.  C.  A.  392.  v.  Lewisohn,  229  U.  S.  613,  33  Sup. 

44.  Bigelow  v.  Old  Dominion  Cop-  Ct.  772,  57  L.  Ed.  1352. 

per,  etc.,  Co.,  225  U.  S.  Ill,  32  Sup.  46.  105  Me.  392,  74  Atl.  1030. 
Ct.  641,  56  L.  Ed.  1009,  Am.  &  Eng. 


264  THE  LAW  OF  PROMOTERS. 

rothers  sold  certain  patents  to  the  corporation,  receiving  in  pay- 
ment substantially  all  of  the  common  stock  and  $100,000  par  value 
of  preferred  stock.  Another  $100,000  par  value  of  pre- 
ferred stock  remained  in  the  treasury  and  was  sold  by  sub- 
scription to  outside  parties.  The  court  pointed  out  the  distinc- 
tion between  a  case  where  all  the  stock  is  issued  to  the  promoters 
and  a  case  where  there  are  future  innocent  purchasers  of  shares 
directly  from  the  treasury ;  stated  that  the  decision  of  the  United 
States  Supreme  Court  in  the  Lewisohn  case  rested  upon  its  own 
authority  and  conflicted  with  the  decision  of  the  Supreme  Court 
of  Massachusetts  which  had  carefully  analyzed  and  distinguished 
all  of  the  cases  cited  as  authority  by  the  Supreme  Court  of  the 
United  States,  and  added  that  if  it  were  necessary  to  choose  be- 
tween the  two  decisions  it  would  adopt  the  one  best  fortified  by 
reason  and  authority.  The  court  said  that  this  was  unnecessary, 
as  the  case  before  it  was  brought  by  the  subsequent  bona  fide  pur- 
chasers of  stock  and  not  by  the  corporation,  and  that  the  Su- 
preme Court  of  the  United  States,  while  denying  relief  to  the  cor- 
poration, had  intimated  that  subsequent  purchasers  might  have 
a  right  to  relief  because  they  were  the  parties  wronged.  The 
learned  judge  apparently  misapprehended  the  meaning  of  the 
Supreme  Court.  What  Justice  Holmes  intended  was,  not  that  the 
court  might  have  sustained  an  action  brought  on  behalf  of  the 
corporation  by  a  subsequent  purchaser  of  treasury  stock  suing  as 
a  minority  stockholder — for  the  right  of  the  plaintiff  would  in  such 
action  be  no  greater  than  that  of  the  corporation,47 — but  that  if 

47.  Federal. — Whitney     v.     Fair-  Supp.    635;    Averill    v.    Barber,    25 

banks,  54  Fed.  Rep.  985.  St.   Rep.   194,   196,    6   Supp.   255,   2 

California. — Turner   v.   Markham,  Silv.  40,  53  Hun  636. 
155  CaL  562,  570,  102  Pac.  272.  Wisconsin. — Jenkins    v.    Bradley, 

New    York.— Continental    Securi-  104   Wis.    540,    551-552,    80   N.    W. 

ties   Co.    v.   Belmont,   206  N.    Y.   7,  1025,  1028. 

99  N.  E.  138,  51  L.  R.  A.  N.  S.  112,          United  Kingdom  and   Colonies. — 

Am.  &  Eng.  Ann.  Gas.,  1914  A.  777,  Burland  v.  Earle,  1902  App.  Gas.  83, 

affirming,    150    App.    Div.    298,   134  93. 


LAWFUL  PROFITS.  265 

there  was  a  wrong  to  anybody,  it  was  to  the  subsequent  subscrib- 
ers individually,  and  that  the  remedy,  if  any,  was  personal  to 
them.  Mason  v.  Carrothers,  however,  indicates  that  the  courts 
of  Maine  will,  when  the  question  arises,  follow  the  ruling  of  the 
Massachusetts  courts.  New  Jersey  also  48  will  presumably  follow 
the  same  ruling. 

In  Hughes  v.  Cadena  DeCobre  Mining  Co.,49  the  Supreme  Court 
of  Arizona  followed  the  decision  of  the  Supreme  Court  of  the 
United  States  as  binding  upon  the  territorial  court. 

New  York  seems  to  follow  the  Supreme  Court  of  the  United 
States.50  California  seems  to  adhere  to  the  distinction  between 
the  rights  of  persons  subsequently  purchasing  shares  from  the  pro- 
moters, and  the  rights  of  persons  subsequently  obtaining  shares 
from  the  corporation  itself.51 

§  130.  The  same  subject. — Discussion. 

If  one  may  be  permitted  to  express  an  opinion  on  the  merits  of 
a  question  upon  which  the  highest  courts  in  the  land  disagree,  it 
is,  after  much  hesitation,  suggested  that  the  decision  of  the  Su- 
preme Court  of  the  United  States  is  on  the  whole  to  be  preferred.52 
The  decision  of  the  Supreme  Court  of  Massachusetts  is,  it  is  true, 
best  supported  by  authority.53  There  is,  however,  as  pointed 

48.  See  Arnold  v.  Searing,  78  N.  This  case  might  well  have  been  de- 
J.    Eq.    146,    161-162,   78   Atl.    762;  cided   upon   the   ground   that   inno- 
Bigelow    v.    Old    Dominion   Copper,  cent  parties  had  acquired  an  equi- 
etc.,  Co.,  74  N.  J.  Eq.  457,  71  Atl.  table  interest  in  the  shares  before 
153.  -the  transaction  complained  of,  but 

49.  13  Ariz.  52,  65,  108  Pac.  231,  the  court  apparently  based  its  de- 
236.  cision  upon  the  fact  that  a  subse- 

50.  Continental  Securities  Co.   v.  quent   sale   of   treasury    stock    was 
Belmont,  168  N.   Y.  App.  Div.  483,  contemplated  at  the  time. 

154  Supp.  54.     See  also  Watkins  v.  52.  For    a    consideration    of    the 

Mills,  114  N.  Y.  App.  Div.  903,  100  same  decisions  from  a  different  as- 

Supp.  1148,  discussed  in  §  127,  ante,  pect  see  ante,  §  123. 

51.  California-Calaveras     Mining  53.  For  cases  supporting  the  de- 
Co,  v.  Walls,  —  Cal.  — ,  149  Pac.  595.  cision  of  the  Massachusetts  court, 


266  THE  LAW  OF  PROMOTERS. 

out  by  the  Supreme  Court  of  the  United  States,  no  substantial 
difference  between  a  case  where  shares  are  subsequently  issued  by 
the  corporation  directly  to  the  subscribers,  and  a  case  where  all 
the  shares  are  first  issued  to  the  promoters  and  by  them  sold  to  the 
public.  If  substantial  justice  is  to  be  sought  "  it  would  seem 
desirable  to  get  a  rule  that  would  cover  both  of  the  almost  equally 
possible  cases  of  what  is  deemed  a  wrong."  54  Nor  is  there  any 
difficulty  in  supporting  the  decision  of  the  Supreme  Court  of  the 
United  States  from  a  technical  standpoint,  for  it  applies  the 
fundamental  doctrine  that  a  corporation  remains  unchanged  and 
unaffected  in  its  identity  by  changes  in  its  membership.  The 
theory  of  the  rights  of  future  allottees,  upon  which  the  decisions 
supporting  the  contrary  doctrine  must  rest,  is  a  fiction  of  law 
which  lost  all  substantial  value  as  soon  as  the  courts  adopted  the 
rule  that  there  can  be  no  fraud  upon  the  corporation  if  the  pro- 
moters themselves  take  the  entire  capital  stock  of  the  corporation, 
and  resell  shares  to  innocent  purchasers.55  Substantial  rights 
should  not  be  made  to  turn  upon  mere  matters  of  form.  If  it  is 
a  fraud  for  promoters  to  make  a  profit  out  of  the  promotion  with- 
out a  disclosure  to  the  directors  or  stockholders,  it  can  make  but 
little  difference  whether  such  profit  is  taken  immediately  before  or 
immediately  after  the  subscriptions  are  obtained,56  or  whether  the 

see  ante,  §  124.    The  decision  of  the  sure  that  the  fact  that  it  was  in 

Supreme  Court  of  the  United  States  contemplation    to    issue    additional 

finds  support  in  Garretson  v.  Pacific  shares    was    enough    to    upset    the 

Crude  'Oil  Co.,  146  Cal.  184,  79  Pac.  transaction. 

838,  also  perhaps  in  Stewart  v.  St.  For   decisions   subsequent   to   the 

Louis  F.   S.  &  W.  R.  Co.,  41  Fed.  Old  Dominion  Copper  Co.  cases,  see 

Rep.  736,  and  in  St.  Louis  F.  S.  &  §  129. 

W.  R.  Co.  v.  Tiernan,  37  Kan.  606,  54.  210  U.  S.  206,  215,  28  Sup.  Ct. 

633,  15  Pac.  544.     Also  perhaps  in  634,  52  L.  Ed.  1025. 

Watkins   v.   Mills,   114   N.   Y.   App.  55.  See  ante,  §  120,  et  seq. 

Div.  903,  100  Supp.  1148.     For  the  56.  Plaquemines    Tropical    Fruit 

facts  of  this  case,  see  ante,  §  127,  Co.  v.  Buck,  52  N.  J.  Eq.  219,  232- 

See  also  In  re  Darby,  1911,  1  K.  B.  233,   27    Atl.   1094,  44   Am.   &   Eng. 

95,  103,  80  L.  J.  K.   B.  180,  where  Corp.    Cas.    686;    Pittsburg    Mining 

Phillimore,  J.,  said  that  he  was  not  Co.  v.  Spooner,  74  Wis.  307,  322,  42 


I  LAWFUL  PROFITS.  267 

subsequent  shareholders  are  brought  in  as  original  subscribers 
or  as  purchasers  from  the  promoters.  The  only  manner  in  which 
these  apparently  unsubstantial  distinctions  can  be  accounted  for, 
is  that  the  rule  against  promoters'  profits,  while  just  in  theory, 
often  works  a  great  hardship  in  practice.  It  is  true  that  where 
the  venture  is  a  small  one,  the  shareholders  few,  and  the  transac- 
tion resembles  a  partnership  under  corporate  guise,  the  subscrib- 
ers may  well  believe  that  the  promoters  are  making  no  profit  and 
seeking  no  compensation  for  their  services.  In  the  case  of  large 
flotations  it  is  generally  a  matter  of  common  knowledge,  or  at 
least  of  necessary  surmise,  that  the  persons  engaged  in  the  promo- 
tion expect  to  receive,  in  return  for  their  labor  and  risk,  a  liberal 
reward  in  the  shape  of  substantial  promoters'  profits.  If  the  sub- 
scribers are  not  aware  of  the  profits  to  be  made  by  the  promoters, 
it  is  generally  because  they  do  not  trouble  to  inquire,  or,  feeling 
that  their  inquiries  might  not  be  well  received,  accept  their  shares 
upon  the  strength  of  the  reputation  of  the  promoters,  and  the 
success  of  their  previous  enterprises,  being  quite  willing  that  the 
promoters  should  take  such  personal  profits  as  they  see  fit.  Ob- 
jection is  made  only  after  the  enterprise  has  proved  unsuccessful, 
and  the  subscribers  are  anxious  to  find  some  means  of  shifting 
their  losses  to  the  promoters.  The  promoters  are  then  called  upon 
to  make  proof  of  a  sufficient  disclosure,  and  this  may,  even  though 
the  subscribers  actually  had  ample  knowledge,  often  be  impossible. 
It  has  been  said  that  although  it  is  the  undoubted  duty  of  the 
courts  to  relieve  those  deceived  by  false  representations,  their 
duty  is  equally  clear  to  be  careful  that  in  their  anxiety  to  correct 
fraud  they  do  not  enable  persons  who  joined  with  others  in  specu- 
lations to  convert  their  speculations  into  certainties  at  the  ex- 

N.  W.  259,  262,  17  Am.  St.  Rep.  149,  170,  affirmed,  sub  nom.  Gluckstein  v. 

24  Am.  &  Eng.  Corp.  Gas.  1;  In  re  Barnes,  1900  App.  Gas.  240;   In  re 

British  Seamless  Paper  Box  Co.,  L.  Leeds  &  Hanley  Theatres  of  Varie- 

R.  17  Ch.  Div.  467,  471 ;  In  re  Olym-  ties,  1902,  2  Ch.  Div.  809,  824. 
pia,  Ltd.,  1898,  2  Ch.  Div.  153,  169, 


268  THE  LAW  OF  PROMOTERS. 

pense  of  those  with  whbm  they  joined.57  The  promoters  certainly 
should  not  be  permitted  secretly  to  profit  by  the  promotion,  but 
one  cannot  but  fear  that  the  liability  of  the  promoters  rests  in 
many  cases,  not  so  much  upon  the  absence  of  knowledge  on  the 
part  of  the  subscribers,  as  upon  the  lack  of  legal  proof  in  the 
hands  of  the  promoters.  It  is  impossible  to  frame  any  rule  which 
will  work  justice  in  every  case,  but  the  liability  of  the  promoters 
under  the  present  law,  whether  the  decision  of  the  Supreme  Court 
of  the  United  States  or  that  of  the  Supreme  Court  of  Massa- 
chusetts be  followed,  rests  upon  the  form  of  the  transaction,  rather 
than  upon  its  substance.  It  is  suggested  that  the  courts  should 
either  have  stood  strictly  by  the  original  rule  that  the  secret  in- 
terest of  the  promoter  renders  the  transaction  unlawful  unless  a 
sufficient  disclosure  is  proved,  or  else  have  reversed  the  rule  that 
the  burden  of  proof  is  on  the  promoter,  and  placed  upon  the  sub- 
scriber the  burden  of  showing  to  the  satisfaction  of  the  court  that 
he  had,  in  fact,  no  knowledge  or  notice  sufficient  to  put  him  on 
inquiry  as  to  the  promoters'  profits;  or  else  the  entire  theory  of 
the  illegality  of  promoters'  profits  should  be  abandoned  and 
the  court  or  jury  be  permitted  to  decide  in  each  case  whether  it 
can  under  all  the  circumstances  fairly  be  inferred  that  the  pro- 
moters have  taken  unfair  advantage  of  their  fiduciary  position. 
Any  rule  is  preferable  to  one  which  makes  questions  involving,  not 
only  a  legal  liability,  but  an  imputation  of  dishonesty,  turn  upon 
mere  matters  of  form,  and  anything  is  better  than  the  pretence  of 
standing  by  a  definite  rule  of  law  which  must,  in  order  to  avoid 
injustice,  be  continually  evaded  by  indirection.  It  should  be  noted 
that  the  fault  lies  not  with  the  decisions  in  the  Old  Dominon  Cop- 


57.  Jennings  v.  Broughton,  5  DeG.  Cas.  23 ;  McKeown  v.  Boudard- 
M.  &  G.  126,  140;  Smith  v.  Chad-  Peveril  Gear  Co.,  65  L.  J.  Ch.  N.  S. 
wick,  L.  R.  20  Ch.  Div.  27,  67,  46  735;  Bellairs  v.  Tucker,  L.  R.  la 
L.  T.  N.  S.  702,  affirmed,  L.  R.  9  Q.  B.  D.  562,  582;  Karberg's  Case, 
App.  Cas.  187,  5  Am.  &  Eng.  Corp.  1892,. 3  Ch.  Div.  1,  14,  66  L.  T.  N.  S. 

700. 


LAWFUL  PROFITS.  269 

per  Company  cases,  but  that  the  difficulty,  antedating  those  deci- 
sions by  many  years,  arose  when  the  now  generally  recognized  but 
wholly  unsubstantial  exception  was  made  with  regard  to  a  flotation 
in  which  the  entire  issue  of  shares  is  taken  by  the  promoters  and  by 
them  resold  to  the  public. 


CHAPTER  VIII. 

OF  PROMOTERS'  DEFENSES  TO  SUITS  BY  THE  CORPORATION. 

Section  131.  Introductory. 

132.  Waiver  of  disclosure. 

133.  Defense  that  shares  issued  to  promoter  had  no  value. 

134.  Defense    that    promoter    guaranteed    obligations    of   the   cor- 
poration. 

135.  Defense  that  profits  of  promoter  were  invested  in  notes  of 
corporation. 

136.  Defense  that  profits  were  returned  to  co-promoter. 

137.  Defense  that  promoter  surrendered    securities  to  corporation. 

138.  Compromise  between  corporation   and   vendor  no   defense  to 
promoter. 

139.  Defense  that  judgment  sought  would  compel  promoter  to  pay 
more  than  his  share  guilty  promoters  would   be  benefited  by 

140.  Defense  that  other    of  damages, 
recovery. 

141.  Defense   that    defrauded    syndicate   in   turn   defrauded   cor- 
poration. 

142.  Defense  that  corporation  was  itself  guilty  of  fraud. 

143.  Defense   that  moneys    taken   by   promoter   were  acquired  by 
corporation  in  an  unlawful  manner. 

144.  Defense  that  plaintiff  suing  as  minority  stockholder  acquired 
his  shares  in  violation  of  statute. 

145.  Defense  of  participation,   or  acquiescence,  of  plaintiff  stock- 
holder, or  his  assignor. 

146.  Defense   that    subscribers    had    no    knowledge   of   promoter's 
subscription  and  were  not  misled  thereby. 

147.  Reorganization  of  corporation  as  defense. 

148.  Defense  of  assignment  of   company's  claim  against  promoter. 

149.  Defense  of  ulterior  purpose   on  part  of  plaintiff. 

150.  Defense  of  settlement   with    majority  stockholders. 

151.  Statute  of  limitations. 

(270) 


DEFENSES.  271 

152.  Laches. 

153.  Corporation  not  chargeable  with  laches  until  after  knowledge. 

154.  What  is  unreasonable  delay. 

155.  Persons  whose  knowledge  may  be  charged  to  corporation. 

156.  Defense  of  laches  as  depending  upon  nature  of  relief  asked. 
'157.  Delay  as  defense  to  action  at  law  upon  a   rescission. 

158.  Effect  of  judgment  for,  or  against,  co-promoter. 

159.  Defense  of  bankruptcy. 

§  131.  Introductory. 

Promoters  sued  because  of  their  secret  profits,. or  frauds  upon 
the  corporation,  finding  no  satisfactory  defense  to  the  company's 
suit,  often  grasp  in  desperation  at  defenses  that  are  palpably  un- 
tenable. Any  defense  that  has  once  been  attempted  may  well  be 
tried  again,  and  it  is  thought  useful,  in  this  chapter,  not  only  to 
discuss  such  defenses  as  have  been  sustained,  and  such  as  are 
fairly  debatable,  but  to  refer  briefly  to  any  claim  of  defense  that 
has  been  deemed  worthy  of  mention  by  a  court.1 

§  132.  Waiver  of  disclosure. 

An  express  waiver  by  the  subscribers  of  a  disclosure  of  the 
facts  is,  if  fairly  obtained,  a  complete  answer  to  a  complaint  that 
the  promoters  derived  a  secret  profit  from  the  promotion,  or  un- 
lawfully concealed  their  personal  interest  in  a  transaction  with 
the  corporation.2  Where,  however,  the  waiver  clause  is  inserted 
in  a  prospectus,  subscription  contract  or  other  instrument,  as  a 
part  of  the  machinery  for  fraud,  it  affords  no  protection  to  those 
who  contrived  it.3 

1.  For  a  note  on  various  defenses  Supp.  673,  followed,  137  N.  Y.  App. 
of  promoters,   see   Lomita  Land  &  Div.  899,  122  Supp.  1131,  reversed, 
Water  Co  v.  Robinson,  18  L.  R.  A.  203   N.   Y.   210,  96  N.   E.   441,   and 
N.  S.  1132-1134.  cases  cited   in   following   note,   and 

See  also  §§  100,  102,  113,  180,  184,  see  ante,  §  113,  and  post,  206. 

185,  245,  255,  258.  3.  Macleay    v.    Tait,     1906    App. 

2.  Heckscher    v.    Edenborn,    131  Cas.  24,  27,  34,  75  L.  J.  Ch.  N.  S.  90; 
N.  Y.  App.   Div.  253,  257,  264,  115  Pearson  &  Son,  Ltd.,  v.  Dublin  Cor- 


272  THE  LAW  OF  PROMOTERS. 

In  Eland's  Case,4  Poole  and  Binns  were  the  lessees  of  one  quarry, 
the  owners  of  another,  and  had  obtained  the  right  to  a  lease  of  a 
third  known  as  Stone  Dykes.  Poole  and  Binns  proposed  to 
organize  a  company  to  work  the  three  quarries.  They  called  in 
one  Ashworth  and  the  appellant  Bland  to  assist  them.  The  lease 
of  Stone  Dykes  was  thereupon  taken  in  the  name  of  these 
four  persons.  An  agreement  was  entered  into  between  the  parties 
mentioned  on  the  one  part,  and  a  trustee  for  the  intended  company 
on  the  other,  whereby  it  was  agreed  to  sell  the  three  quarries,  or 
the  vendors'  interest  therein,  to  the  company  for  the  sum  of 
£6,600 — payable  part  in  cash  and  part  in  shares — to  be  di- 
vided among  the  four  vendors  in  specified  proportions.  The 
articles  of  association  named  Ashworth  and  Bland  as  directors, 
referred  to  the  agreement  of  sale,  and  provided  that  the  same 
should  not  be  "  impeached  on  the  ground  that  the  directors  of  the 
company  or  any  of  them  are  interested  therein  as  vendors  or  other- 
wise, or  that  they  are  the  promoters  of  the  company,  nor  shall 
they  be  accountable  for  the  benefits  secured  to  them,  or  which 
they  or  any  of  them  may  obtain  under  such  agreement,  and  every 
member  shall  be  deemed  to  have  had  notice  of  the  terms  of  such 
agreement  and  to  approve  and  sanction  the  same."  The  court 
held  that  the  agreement  was  nothing  but  a  scheme  to  enable  Bland 
and  Ashworth  to  obtain  shares  for  their  services  in  getting  up 
the  company,  that  the  articles  of  agreement  did  not  protect  the 
transaction,  as  the  company,  while  it  knew  that  Bland  and  Ash- 
worth were  among  the  lessees  of  Stone  Dykes,  did  not  know  that 
making  them  lessees  was  merely  machinery  to  obtain  for  them  pay- 
ment for  their  services. 

§  133.  Defense  that  shares  issued  to  promoter  had  no  value. 
It  has  been  held  that  if  the  promoters  issue  to  themselves,  with- 

poration,   1907   App.   Cas.   351,   365,      Div.  421.     And  see  ante,  §  113,  and 

and  cases  cited;  Greenwood  v.  Lea-      post,  §  206. 

ther   Shod  Wheel  Co.,  1900,   1   Ch.         4.  1893,  2  Ch.  Div.  612. 


DEFENSES.  273 

out  consideration,  shares  of  the  company's  stock,  it  is  no  defense 
to  an  action  brought  against  them  by  the  company  for  the  can- 
cellation of  these  shares  and  for  an  accounting,  that  the  company 
at  the  time  of  the  issue  of  the  shares  had  as  yet  acquired  no 
assets,  and  that  the  shares  were,  therefore,  at  that  time  of  no  value ; 
for,  it  is  said,  the  shares  represent  a  right  and  interest  in  the 
management  and  profits  of  the  corporation,  as  well  as  in  its 
assets.5  If  the  promoters  have  unlawfully  obtained  the  shares  of 
the  corporation,  the  fact  that  they  gained  nothing  by  the  trans- 
action is  immaterial.6 

§  134.  Defense   that  the   promoter   guaranteed   obligations   of 

the  corporation. 

If  the  promoters  are  guilty  of  taking  unlawful  profits,  the  fact 
that  they  have  guaranteed  the  notes  or  contract  obligations  of 
the  company  and  devoted  their  time  to  the  company's  business, 
does  not  excuse  them  from  liability.  In  Hinkley  v.  Sac  Oil  Pipe 
Line  Co.,7  the  court,  decided  that  185,000  shares  issued  to  the 
promoters  had  been  issued  gratuitously  and  under  such  circum- 
stances as  to  constitute  a  fraud  upon  the  corporation.  The  pro- 
moters had  guaranteed  the  company's  notes,  had  mutually  agreed 
to  carry  out  the  proposed  enterprise,  and,  after  the  company  had 
been  organized,  devoted  their  time  and  expended  their  money  for 
its  benefit.  The  court  held  that  these  circumstances  did  not  re- 
lieve the  promoters  from  liability  for  the  shares  taken  by  them,  as 
the  notes  were  to  be  paid  by  the  company  in  the  first  instance, 
and  neither  the  promoters'  guarantee,  nor  any  other  of  the  mat- 
ters mentioned,  constituted  payment  for  the  shares  that  they  had 
taken. 

5.  Hughes     v.     Cadena     DeCobre      ment  Co.,   158   Mich.   348,   353,   122 
Mining   Co.,   13   Ariz.   52,   108   Pac.      N.  W.  614. 

231.    And  see  post,  §§  165,  245.  7.  132  Iowa  396,  107  N.  W.  629, 

6.  Torrey  v.  Toledo  Portland  Ce-     119  Am.  St.  R.  564. 


274  THE  LAW  OF  PROMOTERS. 

§  135.  Defense  that  profits  of  promoter  were  invested  in  notes 

of  the  corporation. 

It  has  been  held  that-  a  promoter  who,  pursuant  to  an  under- 
standing with  the  directors,  invests  in  the  debenture  bonds  of  the 
-corporation  the  promotion  moneys  unlawfully  paid  to  him,  is  not 
to  be  treated  as  having  repaid  these  moneys,  and  is  not  under 
the  English  Companies  Act  entitled  to  a  set-off  against  the  claim 
•of  the  liquidator.8 

§  136.  Defense  that  profits  were  returned  to  co-promoter. 

It  is  no  defense  to  an  action  by  the  corporation  for  the  re- 
covery of  an  unlawful  profit  received  by  a  promoter,  that  such 
promoter  had  theretofore  returned  the  amount  of  his  profit  to  his 
fellow  promoter  from  whom  he  received  it.  In  Lomita  Land  & 
Water  Co.  v.  Robinson,9  Freeman,  one  of  the  promoters,  received 
upon  the  promotion  an  unlawful  profit  amounting  to  $6500. 
Freeman  retained  $2600  for  himself  and  paid  $1300  each,  to 
three  of  his  fellow  promoters.  Cline,  one  of  these  three,  when  he 
J earned  of  the  subscribers'  objection,  returned  his  share  of  the 
profit  to  Freeman.  The  court  said  that  while  this  fact  should, 
in  justice  to  Cline,  be  noted,  it  did  not  affect  his  liability  to  the 
company. 

§  137.  Defense   that   promoter   surrendered   securities    to   the 

corporation. 

In  Arnold  v.  Searing,10  the  defendant  promoters  had  taken  a 
large  profit  in  the  bonds  and  shares  of  the  company,  under  cir- 
cumstances which,  the  court  held,  rendered  the  transaction  unlaw- 
ful. Many  months  after  the  transaction  had  been  completed  the 

8.  In  re  Anglo-French   Co-opera-  762,    769.      No    allowance    for    the 
tive  Society,  L.  R.  21  Ch.  Div.  492.  shares    surrendered    by    him    could 

9.  154  Cal.  36,  44-45,  97  Pac.  10,  have  been  asked  by  the  promoter  as 
18  L.  R.  A.  N.  S.  1106,  1122-1123.  he  had  not  been  charged  with  the 

10.  78  N.  J.  Eq.  146,  164,  78  Atl.      value  thereof.    See  post,  §  165. 


DEFENSES.  275 

company  became  involved  in  financial  difficulties,  and  one  of  the 
promoters,  together  with  other  stockholders  and  bondholders,  in 
order  to  save  it  from  insolvency,  surrendered  to  it  a  large  amount 
of  stocks  and  bonds.  It  was  claimed  on  behalf  of  this  promoter, 
who  was  held  liable  .for  the  bonds  received  by  him,  that  he  should 
on  any  accounting  to  which  he  might  be  subjected,  be  credited  with 
the  amount  of  the  bonds  which  he  had  so  surrendered.  The  court 
held  that  the  promoter  was  not  entitled  to  credit  for  the  bonds 
surrendered  by  him ;  that  he  should  be  called  upon  to  account  for 
the  bonds  which  he  had  received  as  of  the  time  that  he  received 
them ;  that  if  he  afterwards  saw  fit  to  surrender  the  bonds  or  to 
employ  them  in  some  other  manner  for  the  advantage  of  the  sink- 
ing company,  he  could  not  have  credit  therefor  without  the  consent 
of  the  parties  interested;  that  it  was  not  claimed  that  the  com- 
pany had,  at  the  time  that  the  bonds  were  surrendered  to  it,  re- 
leased him  from  liability  or  accepted  the  bonds  on  account  of  his 
liability  or  done  anything  other  than  accept  the  bonds  as  a  gift, 
and  that  there  could  be  no  set-off  either  legal  or  equitable. 

§  138.  Compromise  between  corporation  and  vendor  no  de- 
fense to  promoter. 

If  the  claim  against  the  promoter  arises  out  of  the  acceptance 
by  him  of  a  commission  from  one  selling  property  to  the  corpo- 
ration, the  fact  that  the  corporation  upon  learning  of  such  com- 
mission brought  suit  against  the  vendor  for  the  rescission  of  its 
purchase,  and  received  a  large  sum  of  money  upon  the  settlement 
of  such  suit,  is  no  defense  to  an  action  brought  by  the  corpora- 
tion against  the  promoter  to  recover  the  commission  received  by 
him. 

In  Bagnall  v.  Carlton,11  the  plaintiff  corporation,  John  Bagnall 
&  Sons,  Ltd.,  had  purchased  from  the  Estate  of  James  Bagnall 
certain  collieries  and  iron  works  at  a  price  of  £290,370.  It  was 

11.  L.  R.  6  Ch.  Div.  371,  399-400,  404. 


276  THE  LAW  OF  PROMOTERS. 

afterwards  discovered  that  the  promoters  had  by  a  secret  agree- 
ment with  the  vendors  received  a  commission  of  £85,000  for  their 
services  in  selling  the  property  and  getting  up  the  company.  The 
company  thereupon  brought  suit  against  the  vendors  and  the 
promoters,  demanding  judgment  for  a  rescission  of  its  purchase, 
or  in  the  alternative  for  an  accounting  by  the  promoters  for  the 
amount  of  their  secret  commission.  Pending  the  suit,  the  plain- 
tiff company  entered  into  a  compromise  with  the  trustees  of  the 
estate  of  James  Bagnall,  by  which,  in  consideration  of  the  pay- 
ment of  £31,000,  it  abandoned  its  demand  for  a  rescission.  The 
corporation,  however,  pressed  its  suit  against  the  promoters. 
It  was  claimed  that  the  promoters  were  entitled  -to  a  deduction 
from  the  amount  of  their  commissions  of  the  sum  which  was  re- 
ceived upon  the  compromise  with  the  Bagnall  Estate.  The  court 
very  properly  overruled  this  contention.  Promoters  are  quasi 
agents  of  the  corporation  which  they  promote,  and  any  profits 
received  by  them  without  its  knowledge  must  be  accounted  for  to 
it.  The  measure  of  their  liability  upon  such  accounting  is,  not 
what  the  corporation  lost,  but  the  profits  which  the  promoters 
gained  by  the  transaction.12 

§  139.  Defense  that  judgment  sought  would  compel  promoter 

to  pay  more  than  his  share  of  damages. 

As  promoters  who  combine  to  secure  for  themselves  unlawful 
profits  or  benefits  are  joint  tort  feasors,  it  is  immaterial  that  the 
judgment  sought  by  the  corporation  will  result  in  compelling  one 
of  them  to  pay  more  than  his  proportionate  share  of  the  profits 
received  by  the  promoters,  or  of  the  damages  suffered  by  the  cor- 
poration.13 

12.  See  Emma  Silver  Mining  Co.  Mission  Land  &  Water  Co.  v.  Flash, 
v.  Grant,  L.  R.  11  Ch.  Div.  918,  938.  97  Cal.  610,  636,  32  Pac.  600,  607. 
See  ante,  §  100.  See  also  New  Sombrero  Phosphate 

13.  Lomita  Land  &  Water  Co.  v.  Co.  v.  Erlanger,  L.  R.  5  Ch.  Div.  73, 
Robinson,  154  Cal.  36,  52,  97  Pac.  10,  114,  25  W.  R.  436,  affirmed,  sub  nom. 
18  L.  R.  A.  N.   S.  1106,  1134;  Ex-  Erlanger    v.    New    Sombrero    Phos- 


DEFENSES.  277 

§  140.  Defense  that  other  guilty  promoters  would  be  bene- 
fited by  recovery. 

The  fact  that  other  and  equally  guilty  promoters  will,  as 
stockholders  of  the  company,  be  benefited  by  the  recovery,  is  no 
defense  to  a  promoter  sued  by  the  corporation.  Such  a  defense 
was  overruled  in  New  Sombrero  Phosphate  Co.  v.  Erlanger,14  the 
master  of  the  rolls  saying,  "  The  argument  goes  too  far,  because 
it  would  apply  to  a  case  of  the  grossest  fraud  in  every  instance  in 
which  one  or  more  of  the  actual  shareholders  of  a  company  took 
part  in  that  fraud.  If  the  argument  were  once  allowed  to  pre- 
vail, it  would  only  be  necessary  to  corrupt  one  single  shareholder 
in  order  to  prevent  a  company  from  ever  setting  the  contract 
aside.  It  may  be  said  you  give  to  the  shareholder,  who  was  a 
party  to  the  fraud,  a  profit,  because  he  will  take  it  in  respect  of 
his  shares,  and  since  as  between  co-conspirators  there  is  no  con- 
tribution, therefore  his  brother  conspirators,  who  are  made  liable 
for  the  fraud,  cannot  make  him  repay  his  proportion.  But  the 

phate  Co.,  L.  R.  3  App.  Gas.  1218,  And  see  Commonwealth  S.  S.  Co. 
6  Eng.  Rul.  Gas.  777,  39  L.  T.  N.  S.  v.  American  Shipbuilding  Co.,  197 
269,  27  W.  R.  65.  See  also  post,  §§  Fed.  Rep.  780,  793,  and  same  v. 
190  and  303.  same,  197  Fed.  Rep.  797,  810,  af- 
14.  L.  R.  5  Ch.  Div.  73,  114,  25  firmed,  215  Fed.  Rep.  296,  131  C.  C. 
W.  R.  436,  affirmed,  *«&  now.  Er-  A.  596,  where  the  suit  was  against 
langer  v.  New  Sombrero  Phosphate  the  vendor  for  a  rescission  of  the 
Co.,  L.  R.  3  App.  Gas.  1218,  6  Eng.  sale  because  of  a  secret  commission 
Rul.  Gas.  777,  39  L.  T.  N.  S.  269,  paid  to  the  promoters,  and  the  fact 
27  W.  R.  65,  followed  in  Exter  v.  that  the  promoters  were  stock- 
Sawyer,  146  Mo.  302,  325,  47  S.  W.  holders  of  the  plaintiff  corporation 
951,  957 ;  Old  Dominion  Copper,  etc.,  was  held  to  be  immaterial. 
Co.  v.  Bigelow,  188  Mass.  315,  327,  In  Old  Dominion  Copper,  etc.,  Co. 
74  N.  E.  653,  108  Am.  St.  Rep.  479;  v.  Lewisohn,  210  U.  S.  206,  28  Sup. 
same  v.  same,  203  Mass.  159,  193-  Ct.  634,  52  L.  Ed.  1025,  the  court 
194,  89  N.  E.  193,  40  L.  R.  A.  N.  S.  said  (p.  213),  that  if  there  had  been 
314.  See  also  Davis  v.  Las  Ovas  innocent  members  at  the  time  of  the 
Co.,  227  U.  S.  80,  33  Sup.  Ct.  197,  sale,  the  fact  that  there  were  also 
57  L.  Ed.  426;  McEwen  v.  Harri-  guilty  ones  would  not  have  pre- 
man  Land  Co.,  138  Fed.  Rep.  797,  vented  a  recovery. 
71  C.  C.  A.  163. 


278  THE  LAW  OF  PROMOTERS. 

doctrine  of  this  Court  has  never  been  to  hold  its  hand  and  avoid 
doing  justice  in  favor  of  the  innocent,  because  it  cannot  appor- 
tion the  punishment  fully  amongst  the  guilty.  A  dozen  parties 
to  a  fraud  may  be  defendants,  and  one  decree  or  judgment  go 
against  all,  and  if  it  is  a  fraud  of  such  a  character  that  none  of 
them  can  bring  an  action  for  contribution,  the  plaintiff  may  at  his 
will  and  pleasure  enforce  that  judgment  against  any  one  of  them, 
and  perhaps  pass  over  the  most  guilty  of  them;  still  there  is  no 
remedy  as  between  those  who  commit  the  fraud.  It^is  one  of  the 
punishments  of  fraud  that  there  is  no  such  remedy,  and  that  a 
guilty  party,  though  not  the  most  guilty,  may  suffer  the  greatest 
amount  of  punishment.  It  is  one  of  the  deterrents  to  men  to  pre- 
vent their  committing  fraud." 

In  McEwen  v.  Harriman  Land  Company,15  the  receivers  of  the 
East  Tennessee  Land  Company,  an  insolvent  corporation,  had 
brought  suit  against  Leeson  and  Hopewell,  two  of  its  promoters, 
to  recover  the  secret  .profits  made  by  them  upon  the  promotion  of 
the  corporation,  and  had  as  a  result  of  such  suit  recovered  large 
sums  of  money.  In  the  meantime,  the  Harriman  Land  Company 
had  been  organized  by  a  reorganization  committee  of  the  East 
Tennessee  Land  Company  and  the  creditors  of  the  old  company 
were  permitted  to  transfer  their  claims  to  the  new  company  receiv- 
ing its  shares  in  exchange.  Among  the  larger  holders  of  the 
Harriman  Land  Company  stock  were  certain  promoters  of  the 
East  Tennessee  Land  Company,  who  had  upon  the  organization 
of  the  East  Tennessee  Land  Company  made  profits  to  a  like  ex- 
tent with  Leeson  and  Hopewell.  It  was  held  that  this  was  no 
ground  for  refusing  to  allow  the  Harriman  Land  Company  to 
share  in  the  moneys  recovered  in  the  suits  against  Leeson  and 
Hopewell. 

A  court  of  equity  will,  however,  when  possible,  so  frame  its 
decree  that  the  guilty  parties  shall  receive  no  benefit  from  the 

15.  138  Fed.  Rep.  797,  71  C.  C.  A.  163. 


DEFENSES.  279 

recovery  of  the  corporation.16  The  fact  that  all  the  shares  are,, 
at  the  time  of  the  'suit,  held  by  persons  who  were  parties  to  the 
transaction  complained  of,  and  that  there  are  no  longer  any  inno- 
cent stockholders  to  be  benefited,  prevents  a  recovery  by  the. 
corporation.17 
i 

§  141.  Defense  that  defrauded  syndicate  in  turn  defrauded  cor- 
poration. 

A  cause  of  action  may  sometimes  result  to  the  corporation  from 
a  fraud  committed  by  one  of  the  promoters  upon  a  syndicate  which 
purchased  property  and  resold  it  to  the  corporation.18  It  is  in 
such  case,  when  the  legality  of  the  promoter's  transaction  is 
questioned  by  the  corporation,  no  answer  that  the  syndicate  was, 
itself  guilty  of  another  and  independent  fraud  upon  the  corpo- 
ration.19 

§  142.  Defense  that  corporation  was  itself  guilty  of  fraud. 

Promoters  sued  by  the  corporation  in  one  case  set  up  as  a  de- 
fense that  the  corporation  had  itself  been  guilty  of  fraud  in  the 
subsequent  sale  of  its  shares.     In  Cuba  Colony  Co.  v.  Kirby,20* 
the  promoters  had  unlawfully  obtained  a  profit  of  $20,000  in  the- 
shares  of  the  company.     The  company  sued  for  the  cancellation 
of  these  shares.     The  promoters  claimed  that  the  corporation  had; 
after  the  acquisition  of  the  property  issued  statements  misrepre- 
senting its  value,  and  cited  the  maxim  "  He  who  comes  into  equity 
must  come  with  clean  hands."     The  court  said,  "  Now  that  the 
promoters — who  were  largely  responsible  for  the  issuance  of  these 

16.  Hyde    Park    Terrace    Co.    v.  Baker,  128  N.  Y.  Supp.  954,  affirmed, 
Jackson  Bros.  Realty  Co.,  161  N.  T.  144  N.  Y.  App.  Div.  939,  129  Supp. 
App.  Div.  699,  146  Supp.  1037.  1135,  affirmed,  207  N.  Y.  675,  100  N. 

17.  Richard  Hanlon  Millinery  Co.  E.  1130.    See  Old  Dominion  Copper, 
v.  Mississippi  Valley  Trust  Co.,  251  etc.,  Co.  v.  Bigelow,  203  Mass.  159, 
Mo.  553,  158  S.  W.  359.  199-200,  89  N.  E.  193,  40  L.  R.  A.  N. 

18.  See  post,  §  301.  S.  314. 

19.  See    Midwood    Park    Co.    v.  20.  149  Mich.  453,  112  N.  W.  1133. 


280  THE  LAW  OF  PROMOTERS. 

false  statements — have  no  longer  any  relation  to  the  corporation, 
we  do  not  believe  that  such  statements  will  continue  to  be  issued 
or  that  harm  will  come  from  those  that  have  been  issued.  It  is 
not  to  be  assumed  therefore  that  the  decree  in  this  case  will  be  so 
used  as  to  enable  complainant  to  perpetrate  a  fraud  similar  in  kind 
to  that  of  which  it  complains.  Under  these  circumstances  the 
maxim  relied  upon  by  the  defendants  does  not  apply.?' 

§  143.  Defense  that  moneys  taken  by  the  promoter  were  ac- 
quired by  the  corporation  in  an  unlawful  manner. 

Promoters  have,  when  sued  by  the  corporation  for  unlawful 
profits,  set  up  as  a  defense  the  fact  that  the  moneys  taken  had 
been  acquired  by  the  corporation  by  means  of  an  illegal  issue  of 
its  shares. 

In  Pittsburg  Mining  Co.  v.  Spooner,21  the  corporation  brought 
suit  against  the  promoters  to  recover  profits  unlawfully  taken  by 
them.  The  defendants  demurred  to  the  complaint  claiming  that 
the  money  with  which  the  corporation  paid  the  defendants  for  their 
option  had  been  obtained  by  it  by  an  illegal  issue  or  sale  of  its 
stock,  and  that  no  action  would  lie  to  recover  of  the  defendants 
any  part  of  the  money  so  illegally  obtained  by  it.  Judge  Taylor, 
writing  the  opinion  of  the  court,  said,  "  Under  my  construction  of 
the  allegations  of  the  complaint,  it  is  very  clear  that  the  fact  that 
the  corporation  received  the  money  which  paid  the  defendants  for 
their  mining  option  upon  an  illegal  issue  of  its  stock,  cannot  be  a 
defense  to  this  action  to  compel  them  to  refund  to  the  company 
so  much  of  the  purchase  price  as  was  unlawfully  received  by  them 
on  such  sale.  The  basis  of  the  argument  of  the  learned  counsel 
is  that  these  defendants  received  the  money  of  the  stockholders 
upon  this  alleged  illegal  sale  of  the  stock  as  the  agents  of  the 
corporation,  and  that  as  such  agents  they  cannot  be  made  to  ac- 
count to  their  principal  for  the  money  so  received  by  them  upon 

21.  74   Wis.   307,   324,  42   N.   W.      24  Am.  &  Eng.  Corp.  Gas.  1. 
259,  263-264,  17  Am.  St.  Rep.  149, 


DEFENSES.  281 

such  illegal  sales.  Admitting  this  to  be  a  true  statement  of  the 
facts  alleged  in  the  complaint,  I  think,  under  the  decisions  of  this 
and  many  other  courts,  these  agents  cannot  set  up  the  illegality 
of  the  transactions  as  a  defense  to  an  action  by  the  principal  to 
recover  the  money  of  its  agents."  The  court  added  that  the  alle- 
gations of  the  complaint  furthermore  showed  that  the  money  re- 
ceived on  the  sale  of  stock  came  into  the  possession  of  the  corpo- 
ration; that  such  money  was,  notwithstanding  the  illegality  of 
the  transaction,  the  money  of  the  corporation  as  against  all  the 
world,  and  that  the  promoters  must  account  therefor. 

In  Yale  Gas  Stove  Co.  v.  Wilcox,22  the  defendants,  desiring  to 
sell  certain  patents  to  the  corporation  for  $3,000  in  cash  and 
$5,000  in  shares,  made  a  contract  to  sell  the  patents  to  it  for 
$20,000  par  value  of  shares.  Of  these  shares  the  defendants  re- 
tained $5,000  par  value,  returned  $5,000  to  the  treasury  of  the 
company  and  sold  $10,000  par  value  for  $6,000,  in  cash,  of  which 
sum  they  retained  $3,000  and  paid  the  other  $3,000  into  the  treas- 
ury. The  company  brought  suit  to  recover  the  amount  of  a  com- 
mission unlawfully  paid  to  one  of  the  defendants.  The  defendants 
claimed  that  the  corporation  had,  to  avoid  the  statute  and  de- 
fraud the  public,  made  a  sham  contract,  and  that  a  court  of  equity 
should  leave  the  parties  where  it  found  them ;  that  the  court  should 
not  order  one  party  to  give  up  to  the  other  an  illegal  profit  while 
permitting  that  other  to  keep  an  equally  illegal  profit  obtained  in 
the  same  transaction.  The  court  said  that  the  maxim  that  "  he 
who  comes  into  equity  must  come  with  clean  hands  "  had  no  ap- 
plication, as  it  refers  solely  to  wilful  misconduct  in  regard  to  the 
matter  in  litigation,  and  that  an  indirect  connection  between  an 
obligation  and  an  illegal  transaction  would  not  bar  the  enforce- 
ment of  the  obligation  if  the  plaintiff  did  not  require  the  aid  of 
the  illegal  transaction  to  make  out  his  case.28 

22.  64  Conn.  101,  128,  29  Atl.  303,      47  Am.  &  Eng.  Corp.  Gas.  647. 
25  L.  R.  A.  90,  42  Am.  St.  Rep.  159,          23.  Citing   Snell's   Eq.   35 ;    Arm- 


282 


THE  LAW  OF  PROMOTERS. 


§  144.  Defense  that  plaintiff  suing  as  minority  stockholder 
acquired  his  shares  in  violation  of  statute. 

Where  suit  on  behalf  of  the  corporation  is  brought  by  a  minor- 
ity stockholder,  the  fact  that  the  shares  of  the  plaintiff  stock- 
holder were  issued  to  him,  in  violation  of  the  provisions  of  the 
statute,  at  less  than  the  par  value  thereof,  does  not  in  most  juris- 
dictions constitute  a  defense  to  the  promoters  when  sued  by  the 
corporation.  This  question,  however,  depends  upon  the  interpre- 
tation of  the  statutes  of  the  state  in  which  the  ^corporation  is 
organized,  and  the  language  of  the  particular  statute  must  in  each 
case  be  considered. 

In  Arnold  v.  Searing,24  the  plaintiffs  were  members  of  a  syndi- 
cate which  had  received  $2,000,000  in  bonds  and  a  bonus  of  a  like 
amount  of  stock  upon  the  payment  of  $1,900,000.  The  vice 
chancellor  said,  "  Is  there  to  be  found  in  this  plan  such  uncon- 


strong  v.  American  Exchange  Bank 
of  Chicago,  133  U.  S.  433,  33  L.  Ed. 
747,  10  Sup.  Ct.  450;  Lewis  &  Nel- 
son's Appeal,  67  Pa.  153,  166 ;  Wood- 
ward v.  Woodward,  41  N.  J.  Eq. 
224,  4  Atl.  424;  Pittsburg  Mining 
Co.  v.  Spooner,  74  Wis.  307,  42  N. 
W.  259,  17  Am.  St.  R.  149,  24  Am. 
&  Eng.  Corp.  Cas.  1. 

And  see  post,  §  149. 

24.  73  N.  J.  Eq.  262,  267-268,  67 
Atl.  831.  See  same  case  after  a 
trial  of  the  issues,  78  N.  J.  Eq.  146, 
78  Atl.  762. 

See  also  Pietsch  v.  Krause,  116 
Wis.  344,  93  N.  W.  9,  where  the 
court  arrived  at  the  same  con- 
clusion, (overruling  Hinckley  v. 
Pflster,  83  Wis.  64,  53  N.  W.  21), 
though  the  Wisconsin  statute  de- 
clared that  "  No  corporation  shall 
issue  any  stock  or  certificate  of 
stock  except  in  consideration  of 


money,  or  labor  or  property,  esti- 
mated at  its  true  money  value, 
actually  received  by  it,  equal  to  the 
par  value  thereof  ....  and  all 
stocks  ....  issued  contrary  to  the 
provisions  of  this  section  ....  shall 
be  void." 

See  also  Krohn  v.  Williamson,  62 
Fed.  Rep.  869,  875,  affirmed,  s«6 
nom.  Williamson  v.  Krohn,  66  Fed. 
Rep.  655,  13  C.  C.  A.  668,  31  U.  S. 
App.  325;  Barcus  v.  Gates.  89  Fed. 
Rep.  783,  32  C.  C.  A.  337,  61  U.  S. 
App.  596;  Shaw  v.  Staight,  107 
Minn.  152,  119  N.  W.  951,  20  L.  R. 
A.  N.  S.  1077.  Note  to  Lomita  Land 
&  Water  Co.  v.  Robinson,  18  L.  R. 
A.  N.  S.  1134.  See  post,  §  256. 

The  result  may  be  different  if  the 
shares  were  issued  wholly  without 
consideration.  See  Arkansas,  etc., 
Co.  v.  Farmers'  L.  &  T.  Co.,  13  Colo. 
587,  22  Pac.  954. 


DEFENSES.  283 

scientious  conduct  as  will  operate  as  a  bar  to  equitable  relief  at 
the  instance  of  complainants?  I  think  not.  Stock  issued  as  a 
bonus  with  the  sale  of  bonds,  or  stock  issued  through  the  means  of 
over-valuation  of  property  cannot  properly  be  regarded  as  nec- 
essarily issued  fraudulently.  In  the  absence  of  intervening  rights 
of  creditors  such  transactions  appear  to  have  been  generally  sup- 
ported by  the  courts  unless  positive  fraud  has  been  clearly 
established,  notwithstanding  the  constitutional  and  statutory  pro- 
visions of  many  of  the  states  designed  to  secure  a  proper  relation- 
ship between  the  capital  stock  and  the  assets  of  corporations.25 
Complainants  are  de  facto  stockholders.  The  management  of  the 
corporation  will  not  sue.  To  whatever  extent  the  syndicate  plan 
may  be  said  to  be  violative  of  the  spirit  of  our  legislation  touching 
the  issuance  of  stock,  I  think  the  case  presented  by  the  bill  is  one 
in  which  public  policy  may  be  said  to  be  promoted  by  allowing 
complainants  to  sue  in  behalf  of  the  corporation  for  the  restor- 
ation of  the  assets  alleged  to  have  been  fraudulently  appropri- 
ateql  by  defendants." 

§  145.  Defense   of  participation,   or   acquiescence,   of   plaintiff 

stockholder,  or  his  assignor. 

The  fact  that  the  plaintiff  suing  as  a  minority  stockholder  was 
a  party  to,  or  acquiesced  in,  the  transaction  complained  of,  is  a 
bar  to  his  suit.20  The  transferee  of  shares  stands,  according  to 

25.  Citing  Cook  on  Corporations,      &  Trust  Co.,  13  Colo.  587,  603,  22 
§§  46,  47;  Scoville  v.  Thayer,  105  U.      Pac.  954. 

S.  143,  153,  26  L.  Ed.  968,  and  Heb-  Illinois.— Babcock  v.  Farwell,  245 

berd  v.  Southwestern  Land  &  Cattle  111.  14,  40-41,  91  N.  E.  683,  137  Am. 

Co.,  55  N.  J.  Eq.  18,  36  Atl.  122.  St.   Rep.  284,  19  Am.  &  Eng.  Ann. 

26.  Alabama. — Parson   v.   Joseph,  Cas.  74. 

92  Ala.  403,  8  So.  788.  New  Jersey. — Knoop  v.  Bohm- 

Arizona— Hughes  v.  Cadena  De  rich,  49  N.  J.  Eq.  82,  86-87,  23  Atl. 

Cobre  Min.  Co.,  13  Ariz.  52,  61,  108  118,  affirmed,  sub  nom.  Bohmrich  v. 

Pac.  231,  234.  Knoop,  50  N.  J.  Eq.  485,  27  Atl.  636. 

Colorado. — Arkansas  River  Land  Wisconsin. — Spaulding  v.  North 

Town  &  Canal  Co.  v.  Farmers'  Loan  Milwaukee  Town  Site  Co.,  106  Wis. 


284 


THE  LAW  OF  PROMOTERS. 


the  weight  of  authority,  in  the  shoes  of  his  transferor,  and  cannot 
maintain  a  suit  based  upon  a  transaction  in  which  any  prior 
holder  of  his  shares  participated  or  acquiesced.27 


481,  491,  81  N.  W.  1064,  1067; 
Hinckley  v.  Pfister,  83  Wis.  64,  53 
N.  W.  21. 

The  burden  of  proof  is  upon  the 
party  asserting  acquiescence.  See 
Mason  v.  Carrothers,  105  Me.  392, 
408,  74  Atl.  1030,  1037. 

Acquiescence  is  an  affirmative  de- 
fense and  need  not  be  negatived  in 
the  complaint.  Continental  Securi- 
ties Co.  v.  Belmont,  206  N.  Y.  7, 
13,  99  N.  E.  138,  51  L.  R.  A.  N.  S. 
112,  Am.  &  Eng.  Ann.  Gas.  1914  A. 
777. 

27.  Federal. — Brown  v.  Duluth 
M.  &  N.  Ry.  Co.,  53  Fed.  Rep.  889, 
892. 

Arizona. — Hughes  v.  Cadena  De 
Cobre  Min.  Co.,  13  Ariz.  52,  61,  108 
Pac.  231,  234. 

Colorado. — Boldenweck  v.  Bullis, 
40  Colo.  253,  90  Pac.  634. 

Illinois. — Babcock  v.  Farwell,  245 
111.  14,  41,  91  N.  E.  683,  137  Am.  St. 
Rep.  284,  19  Am.  &  Eng.  Ann.  Gas. 
74. 

Maine. — Mason  v.  Carrothers,  105 
Me.  392,  399,  74  Atl.  1030,  1036. 

Massachusetts. — 0 1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  325,  74  N.  E.  653,  108  Am. 
St.  Rep.  479. 

Nebraska. — Home  Fire  Ins.  Co.  v. 
Barber,  67  Neb.  644,  661,  93  N.  W. 
1024,  60  L.  R.  A.  927,  935,  108  Am. 
St.  Rep.  716. 

New  Jersey. — Beling  v.  American 
Tobacco  Co.,  72  N.  J.  Eq.  32,  41,  65 
Atl.  725 ;  Trimble  v.  American  Sugar 


Refining  Co.,  61  N.  J.  Eq.  340,  345- 
346,  48  Atl.  912. 

New  York. — Parsons  v.  Hayes,  50 
N.  Y.  Super,  29,  39,  40,  14  Abb.  N. 
C.  419,  433,  435;  Langdon  v.  Fogg, 
14  Abb.  N.  C.  435;  Kent  v.  Quick- 
silver Mining  Co.  78,  N.  Y.  159,  188 ; 
Ward  v.  Smith,  95  App.  Div.  432,  88 
Supp.  700 ;  In  re  Syracuse,  Chenango 
&  N.  Y.  R.  R.  Co.,  91  N.  Y.  1,  4 ; 
Continental  Securities  Co.  v.  Bel- 
mont, 206  N.  Y.  7,  99  N.  E.  138,  51 
L.  R.  A.  N.  S.  112,  Am.  &  Eng.  Ann. 
Cas.  1914  A.  777. 

United  Kingdom  and  Colonies. — 
Peek  v.  Gurney,  L.  R.  13  Equity  79, 
118,  affirmed,  L.  R.  6  H.  L.  377; 
Ffooks  v.  Southwestern  Railway 
Co.,  1  Smale  &  Giffard  142,  168; 
In  re  Gold  Co.,  L.  R.  11  Ch.  Div.  701, 
713,  48  L.  J.  Ch.  281;  Salomons  v. 
British  Gold  Fields,  etc.,  Ltd.,  12 
Times  Law  Rep.  172. 

Contra  London  Trust  Co.  v.  Mac- 
kenzie, 62  L.  J.  Ch.  N.  S.  870,  877; 
Lagunas  Nitrate  Co.  v.  Lagunas 
Syndicate,  1899,  2  Ch.  Div.  392,  449, 
(dissenting  opinion  of  Rigby,  L.  J.)  ; 
Lindley  on  Companies,  (6th  ed.), 
Vol.  1,  p.  785,  citing  Ashbury  v.  Wat- 
son, L.  R.  30  Ch.  Div.  376,  379,  386. 

It  is  said  in  Parson  v.  Joseph,  92 
Ala.  403,  8  So.  788,  and  in  Forrester 
v.  Boston  &  M.  Consol.  Copper  & 
Silver  Mining  Co.,  21  Mont.  544, 
565,  566,  55  Pac.  229,  353,  that  the 
transferee  would  be  bound  by  the 
acts  of  his  transferor,  if  he  took 
the  shares  with  notice. 


DEFENSES.  285 

§  146.  Defense  that  subscribers  had  no  knowledge  of  pro- 
moter's subscription  and  were  not  misled  thereby. 
Subscribers  claiming  to  have  been  deceived  by  sham  subscrip- 
tions made  by  promoters,  must,  no  doubt,  in  order  to  recover 
damages,  show  that  the  subscriptions  came  to  their  attention,  and 
that  they  acted  in  reliance  thereon.  This  question  is  discussed  in 
a  subsequent  chapter.28  If,  however,  the  promoters  are  sued  by 
the  corporation,  because  of  their  failure  to  properly  disclose  their 
interest  in  the  transaction  under  which  they  received  the  shares 
of  the  company  as  consideration  for  a  conveyance  of  property, 
the  failure  to  show  that  the  subscribers  had  knowledge  of  the  pro- 
moters' subscriptions  and  were  misled  thereby,  seems  to  be  quite 
immaterial.  This  question  was,  however,  considered  in  Wills  v. 
Nehalem  Coal  Co.,29  and  the  case  decided  on  the  ground  that  the 
plaintiff  and  other  stockholders  were  presumably  misled.  The 
promoters  in  that  case  having  acquired  an  option  to  purchase  a 
tract  of  land  for  $12,000,  caused  the  vendors  to  convey  the  land 
to  a  Mrs.  Copeland,  the  wife  of  one  of  the  promoters.  She,  having 
subscribed  for  750  shares  of  a  par  value  of  $75,000,  conveyed  the 
land  to  the  corporation  for  a  pretended  consideration  of  $87,000, 
which  was  paid  $12,000  in  the  corporation's  note,  and  $75,000  in 
shares.  The  plaintiffs  sued  as  minority  stockholders  demanding 
that  Mrs.  Copeland  be  required  to  pay  to  the  corporation  the 

In  Mason  v.  Carrothers,  105  Me.  with  their  preferred  stock,  must  be 

392,  74  Atl.  1030,  the  promoters  hav-  held  to  have  acquiesced  in  all  that 

ing  received  in  payment  for  certain  went  before.     The  court,  however, 

patents    $100,000    in    the    preferred  overruled    this    contention    on    the 

and  about  $800,000  in  the  common  ground  that  the  plaintiffs  could  not 

stock  of  the  company,  turned  back  be    held    to    have    acquiesced    in    a 

to  the  treasury  $200,000  of  common  transaction   of  which   they   had   no 

stock,  some  of  which  was  afterwards  knowledge,  and  that  the  burden  of 

issued  to  the  plaintiffs  as  a  bonus  proving  such   knowledge   was  upon 

upon  their  subscriptions  to  the  pre-  the  defendants, 

f erred  stock.     It  was  claimed  that  28.  See  post,  §§  205-206. 

the  plaintiffs  having  received  some  29.  52  Or.  70,  89,  96  Pac.  528,  535. 
of  this  common  stock  as  a  bonus 


286  THE  LAW  OF  PROMOTERS. 

difference  between  the  par  value  of  the  securities  issued  to  her  and 
the  actual  value  of  the  lands  conveyed  in  consideration  thereof,  or 
in  the  alternative  the  surrender  and  cancellation  of  the  shares.  It 
was  urged  by  the  defendants  that  the  complaint  failed  to  allege 
that  when  the  plaintiffs  purchased  their  shares  they  knew  that 
Mrs.  Copeland  or  anyone  had  subscribed  for  any  stock,  or  that 
they  were  misled  by  her  acts,  or  those  of  the  directors,  or  by  any 
failure  on  their  part  to  disclose  material  information.  The  court 
said  that  it  was  alleged  that  the  corporation  had  been  organized, 
and  before  that  could  be  done,  to  comply  with  the  statute,  50  per 
cent  of  the  stock  must  have  been  subscribed,  and  that  it  would  be 
presumed  that  the  plaintiffs  and  other  stockholders  were  misled.30 

§  147.  Reorganization  of  corporation  as  defense. 

In  Central  Trust  Company  v.  East  Tennessee  Land  Company,31 
the  Federal  court  appointed  a  receiver  of  the  East  Tennessee 
Land  Company,  who  brought  suit  against  its  promoters  in  the 
courts  of  Massachusetts.32  The  defendant  promoters  applied  to 
the  Federal  court  for  an  order  restraining  the  receiver  from 
the  further  prosecution  of  such  suit,  relying  principally  upon  the 
fact  that  certain  stockholders  and  bondholders  of  the  East  Ten- 
nessee Land  Company  had,  with  a  view  to  saving  what  they  could 
from  the  wreck,  joined  in  the  organization  of  the  Harriman  Land 
Company,  which  then  purchased  the  lands  of  the  old  company  at 
judicial  sale  and  issued  its  stock  in  exchange  for  the  stocks  and 
bonds  of  the  old  company.  It  was  claimed  that  the  transactions 
constituted  a  mere  reorganization  of  the  East  Tennessee  Land 
Company,  and  that  the  obligations  of  the  East  Tennessee  Land 
Company  against  its  promoters  had  been  extinguished.  The  argu- 

30.  Citing   2   Thompson   on   Cor-      v.  Harriman  Land  Co.,  138  Fed.  Rep. 
porations,    §    1581,    and    Melvin    v.      797,  71  C.  C.  A.  163. 

Lamar  Insurance  Co.,  80  111.  446,  22  32.  See  Hayward  v.  Leeson,  176 
Am.  Rep.  199.  Mass.  310,  57  N.  E.  656,  49  L.  R.  A. 

31.  116  Fed.  Rep.  743.     McEwen      725. 


DEFENSES.  287 

ment  seems  to  have  been  wholly  without  merit  and  was  promptly 
overruled. 

§  148.  Defense  of  assignment  of  company's  claim  against  pro- 
moter. 

In  the  course  of  the  litigations  arising  out  of  the  organization 
of  the  Old  Dominion  Copper  Company,  the  owners  of  a  majority 
of  the  shares  of  the  company,  a  New  Jersey  corporation,  caused  a 
corporation  to  be  organized  under  the  laws  of  Maine,  to  which 
corporation  they  transferred  their  stock  in  the  New  Jersey  com- 
pany. An  agreement  was  thereupon  entered  into  between  the 
New  Jersey  company,  the  Maine  company,  and  two  men  named 
Smith  and  Hoar,  providing  that  the  Maine  company  as  the  ma- 
jority shareholder  of  the  New  Jersey  company,  should  cause  the 
latter  company  to  realize  upon  its  suits  against  its  promoters,  and 
distribute  the  proceeds  thereof  as  in  the  agreement  provided. 
Smith  and  Hoar  declared  themselves  to  be  trustees  of  any  fund 
obtained  by  virtue  of  this  agreement,  and  issued  certificates  of 
interest  known  as  trust  receipts,  which  were  sold  in  the  market, 
the  holders  thereof  not  being  in  any  substantial  part  the  holders 
of  shares  of  the  Maine  company  or  of  the  New  Jersey  company. 
Bigelow,  one  of  the  promoters,  having  been  sued  in  the  courts  of 
Massachusetts,  filed  a  bill  in  the  New  Jersey  Chancery  Court  to 
restrain  the  prosecution  of  the  Massachusetts  suits,  alleging, 
among  other  reasons,  that  the  holders  of  these  trust  receipts 
were  the  persons  ultimately  entitled  to  the  moneys  to  be  paid  by 
the  Maine  company  to  Smith  and  Hoar  as  trustees,  and  that  the 
prosecution  of  the  suits  in  question  was  not  for  the  benefit  of  the 
New  Jersey  company,  but  for  the  purpose  of  realizing  the  largest 
sums  possible  on  the  trust  certificates ;  that  the  buying  and  selling 
of  such  certificates  amounted  to  trading  in  a  law  suit,  and  that 
the  proceeds  of  any  recovery  would  not  go  to  any  persons  who 
were  originally  interested  in  the  New  Jersey  company,  nor  as  far 
as  fourteen-fifteenths  were  concerned  would  they  go  to  the  New 


288  THE  LAW  OF  PROMOTERS. 

Jersey  company,  and  that  the  greater  part  thereof  would  go  to 
strangers  to  the  transaction  who  had  purchased  the  trust  receipts. 
To  the  argument  in  support  of  the  injunction,  based  upon  the 
facts  thus  disclosed,  Chancellor  Pitney  found  eight  answers :  first, 
that  it  was  not  suggested  that  knowledge  of  the  agreement  men- 
tioned had  been  newly  acquired  by  the  complainant  Bigelow,  and 
that  there  was  no  reason  why  it  should  not  have  been  set  up  in  the 
Massachusetts  suits ;  second,  that  the  New  Jersey  company  was 
not  a  party  to  the  agreement ;  third,  that  the  agreement  was  made 
after  the  suits  sought  to  be  enjoined  had  been  commenced;  fourth, 
that  neither  the  law  nor  policy  of  the  state  of  New  Jersey  pro- 
hibited what  the  complainant  called  a  speculation  in  a  law  suit; 
fifth,  that  in  view  of  the  non-adoption  in  the  state  of  New  Jersey 
of  the  laws  against  champerty  and  maintenance,  and  of  the  absence 
from  the  Corporation  act  of  any  prohibition,  the  Chancellor  was 
unaware  of  anything  in  the  policy  of  the  state  to  prevent  stock- 
holders from  agreeing  among  themselves  to  aid  the  company  in 
proper  ways  in  its  litigations  against  third  parties,  and  to  use 
their  influence  as  stockholders  to  see  that  out  of  the  proceeds  of 
the  litigation,  the  disbursements  made  in  the  company's  behalf 
should  be  refunded,  and  a  special  dividend  made  of  the  net  pro- 
ceeds; sixth,  that  the  agreement,  if  contrary  to  public  policy, 
ought  to  be  nullified,  but  that  the  company  should  not,  on  account 
thereof,  go  without  remedy  against  a  third  party  who  had  de- 
frauded it  before  the  void  agreement  was  made;  seventh,  that  if 
the  defendant  desired  to  uphold  the  supposed  public  policy  of  New 
Jersey  he  could  pay  the  New  Jersey  company  what  he  owed  it,  dis- 
regarding the  claims  of  the  holders  of  the  trust  certificates ;  eighth, 
that  the  agreement  did  not  constitute  a  voting  trust,  that  the 
New  Jersey  corporation  act  recognizes  that  corporate  stock  may 
be  placed  in  pledge,  and  that  the  pledger  and  pledgee  may  agree 
between  themselves  as  to  how  it  shall  be  voted.33 

33.  Bigelow  v.  Old  Dominion  Cop-      492,  71  Atl.  153. 
per,  etc.,  Co.,  74  N.  J.  Eq.  457,  487- 


DEFENSES.  289 

The  Supreme  Court  of  Massachusetts  later  disposed  of  a  de- 
fense based  upon  this  same  agreement  by  showing  that  the  plain- 
tiff company  was  not  a  party  to  the  agreement,  that  the  agree- 
ment was  made  long  after  the  suit  was  instituted,  that  while  the 
agreement  might,  if  illegal,  be  set  aside  in  appropriate  proceedings, 
the  rights  of  the  plaintiff  for  the  benefit  of  all  its  stockholders 
could  not  be  refused  enforcement  by  reason  thereof.34 

§  149.  Defense  of  ulterior  purpose  on  the  part  of  plaintiff. 

Mason  v.  Carrothers 35  was  a  minority  stockholders'  suit 
brought  to  compel  the  cancellation  of  certain  shares  which  were 
claimed  to  have  been  unlawfully  taken  by  the  promoters.  A  de- 
fense was  interposed  that  the  plaintiffs  did  not  come  into  court 
with  clean  hands  as  another  corporation  had  been  formed,  a  ma- 
jority of  its  board  of  directors  being  included  among  the  plain- 
tiffs ;  that  this  new  corporation  had  acquired  from  the  old  cor- 
poration a  lease  of  the  patents  which  it  had  been  organized  to 
practice,  and  that  the  plaintiffs  had  received  share  for  share  in 
the  new  company,  as  a  gift.  It  was  claimed  by  the  plaintiffs  that 
this  was  done  to  protect  the  preferred  stockholders.  The  court 
said  that  whatever  its  purpose,  a  careful  study  of  the  transaction 
failed  to  reveal  anything  soiling  the  hands  of  the  plaintiffs  and 
preventing  their  pursuing  their  equitable  rights  in  the  pending; 
cause.  That  the  maxim  of  clean  hands  applied  solely  to  some  wil- 
ful misconduct  in  reference  to  the  matter  in  litigation,  and  not  to 
some  other  illegal  transaction  though  directly  connected  with  the 
subject  matter  of  the  suit.86 

§  150.  Defense  of  settlement  with  majority  stockholders. 
In  Spaulding  v.  North  Milwaukee  Town  Site  Co.,37  it  appeared 

34.  Old    Dominion    Copper,    etc.,  Wilcox,  64  Conn.  101,  29  Atl.  303, 
Co.  v.  Bigelow,  203  Mass.  159,  200-  25  L.  R.  A.  90,  42  Am.  St.  Rep.  159, 
201,  89  N.  E.  193,  40  L.  R.  A.  N.  S.  47  Am.  &  Eng.  Corp.  Cas.  647.     See 
314.  ante,  §  143. 

35.  105  Me.  392,  408,  74  Atl.  1030,  37.  106  Wis.  481,  496-497,  81  N. 
1037.  W.  1064,  1069. 

36.  Citing  Yale  Gas  Stove  Co.  v. 


290  THE  LAW  OF  PROMOTERS. 

that  all  of  the  stockholders,  except  the  plaintiffs  and  the  holders 
of  twelve  other  shares,  had  "  settled,  accepted  satisfaction  for 
their  stock,  and  released  any  claim  or  right  to  be  reimbursed  for 
their  share  of  the  moneys  obtained  by  defendants  from  the  corpo- 
ration." The  court  said  that  if  the  proceeding  before  it  were  an 
action  at  law,  there  might  be  no  escape  from  the  entry  of  a  money 
judgment  for  the  full  amount.  The  action,  was,  however,  a  mi- 
nority stockholders'  suit,  and  being,  as  such,  in  equity,  the  court 
in  view  of  the  prior  dissolution  of  the  corporation,  ^computed  the 
proportionate  amount  which  each  stockholder  was  entitled  to 
receive  and  decreed  the  payment  thereof  directly  to  him. 

§  151.  Statute  of  limitations. 

As  the  defense  of  the  statute  of  limitations  depends  upon  the 
statute  of  the  particular  jurisdiction,  and  as  such  statutes  and 
the  decisions  construing  them  have  no  peculiar  application  to 
.actions  based  upon  promoters'  liabilities,  an  extended  discussion 
of  this  defense  would  be  out  of  place.  It  is  deemed  sufficient  to 
call  attention  in  the  notes  to  a  few  cases  involving  promoters' 
liability,  in  which  the  bar  of  the  statute  of  limitations  is  dis- 
cussed.38 

38.  Illinois.— Goodwin  v.  Wilbur,  392,  102  N.  W.  342,  68  L.  R.  A.  945, 

104  111.  App.  45,  54.  107  Am.   St.  Rep.  1017. 

Iowa. — The    Telegraph    v.    Loet-          United  Kingdom   and   Colonies. — 

scher,  127  Iowa  383,  101  N.  W.  773,  Re  The  Fitzroy  Bessemer  Steel  Co., 

4  Am.  &  Eng.  Ann.  Cas.  667;  Caffee  Ltd.,  50  L.  T.  N.   S.   144;   Re  Sale 

v.  Berkley,  141  Iowa  344,  118  N.  W.  Hotel   &   Botanical   Gardens,   77   L. 

1267.  T.    N.    S.    681,    reversed    on   other 

Massachusetts. — 0 1  d       Dominion  grounds,  78  L.  T.  N.  S.  368. 
CJopper,    etc.,    Co.    v.    Bigelow,    203          It  is  said  in  Beatty  v.  Neelon,  13 

Mass.  159,  201,  89  N.  E.  193,  40  L.  Can.  S.  C.  1,  19  Am.  &  Eng.  Corp. 

31.  A.  N.  S.  314.  Cas.  236,  affirming,  12  Out.  App.  50, 

Missouri. — Bent  v.  Priest,  86  Mo.  12  Am.  &  Eng.  Corp.  Cas.  20,  that 

475,  488.  delay   for   a    period    less    than   the 

Wisconsin. — Pietsch    v.    Mllbrath,  statutory  limitation  is  an  important 

123  Wis.  647,  659,  101  N.  W.  388,  feature  to  be  considered  in  arriving 

at  the  merits  of  the  case. 


DEFENSES.  291 

§  152.  Laches. 

Laches  in  prosecuting  the  suit  of  the  corporation  is,  in  a  proper 
case,  a  good  defense  to  an  action  in  equity  against  the  promot- 
ers.39 It  is  not  practicable  here  to  enter  into  any  extended  dis- 
cussion of  the  doctrine  of  laches.40  A  few  cases  relating  to  pro- 
moters' frauds,  in  which  the  doctrine  of  laches  is  considered,  may, 
however,  properly  be  referred  to,  and  some  of  the  aspects  of  the 
defense  peculiarly  applicable  to  suits  against  promoters  briefly  dis- 
cussed. 

It  is  said  in  Lindsay  Petroleum  Co.  v.  Hurd  41  that  "  the  doc- 
trine of  laches  in  Courts  of  Equity  is  not  an  arbitrary  or  a  tech- 
nical doctrine.  Where  it  would  be  practically  unjust  to  give  a 
remedy,  either  because  the  party  has,  by  his  conduct,  done  that 
which  might  fairly  be  regarded  as  equivalent  to  a  waiver  of  it,  or 
where  by  his  conduct  and  neglect  he  has,  though  perhaps  not  waiv- 
ing that  remedy,  yet  put  the  other  party  in  a  situation  in  which  it 
would  not  be  reasonable  to  place  him  if  the  remedy  were  after- 
wards to  be  asserted,  in  either  of  these  cases,  lapse  of  time  and 
delay  are  most  material." 

Erlanger  v.  New  Sombrero  Phosphate  Co.42  was  an  action  to 
rescind  a  sale  of  certain  mining  property,  unlawfully  made  to  the 
corporation  by  its  promoter.  Lord  Penzance,  after  referring  to 

39.  See   cases   cited   in   notes   to      817-820,  897,  916,  917,  964,  965,  16 
this  and  succeeding  sections.     Com-      Cyc.  of  Law  &  Procedure,  page  150, 
pare,  however,  Mackey  Baking  Co.      et  seg. 

v.  Mackey,  19  Pa.  Dist  Ct.  893,  904,  41.  L.   B.   5   P.   C.   221,   239-240. 

where  the  court  said  that  the  de-  Quoted    in    Erlanger    v.    New    Som- 

fendant    promoter   and    director   of  brero  Phosphate  Co.,  L.  R.  3  App. 

the    plaintiff    corporation,    being    a  Gas.    1218-1230,   1279,   6   Eng.    Rul. 

trustee,     could     not     plead     laches  Cas.  777,  39  L.  T.  N.  S.  269,  27  W. 

against  his  cestui  que  trust.  R.  65. 

40.  For  a  full  discussion  of  the  42.  L.  R.  3  App.  Cas.  1218,  1230- 
doctrine    of    laches    see    Pomeroy's  1231,  6  Eng.  Rul.  Cas.  777,  39  L.  T. 
Equity     Jurisprudence      (Equitable  N.  S.  269,  27  Weekly  Rep.  65.     See 
Remedies),     §     19-21.       Pomeroy's  also  Farris  v.  Wirt,  16  Colo.  App. 
Equity    Jurisprudence,    §§    418-419,  1,  63  Pac.  946. 


292  THE  LAW  OF  PROMOTERS. 

Lindsay  Petroleum  Co.  v.  Hurd,  supra,  said,  "  Delay,  as  it  seems 
to  me,  has  two  aspects.  Lapse  of  time  may  so  change  the  condi- 
tion of  the  thing  sold,  or  bring  about  such  a  state  of  things  that 
justice  cannot  be  done  by  rescinding  the  contract  subject  to  any 
amount  of  allowances  or  compensations.  This  is  one  aspect  of 
delay,  and  it  is  in  many  cases  particularly  applicable  to  property 
of  a  mining  character.  But  delay  may  also  imply  acquiescence, 
and  in  this  aspect  it  equally  bars  the  plaintiff's  right." 

« 
§  153.  Corporation    not    chargeable    with    laches    until    after 

knowledge. 

A  corporation  suing  in  equity  to  enforce  the  liability  of  its 
promoters  for  a  fraud  committed  by  them,  must  exercise  reason- 
able diligence  in  the  prosecution  of  its  claim.43  The  company  can, 
however,  be  charged  with  delay  only  from  the  time  that  it  ac- 
quires knowledge  of  the  facts  of  which  it  complains  44  or  of  cir- 
cumstances sufficient  to  put  it  upon  inquiry,45  or  from  the  time 

43.  Old    Dominion    Copper,    etc.,      Mass.  159,  201,  89  N.  E.  193,  40  L. 
Co.  v.  Bigelow,  203  Mass.  159,  201,      R.  A.  N.  S.  314. 

89  N.  E.  193,  40  L.  R.  A.  N.  S.  314 ;  Michigan. — Fred     Macey     Co.     v. 

Stephany  v.  Marsden,  76  N.  J.  Eq.  Macey,  143  Mich.  138,  153,  106  N.  W. 

611,  75  Atl.  899 ;  Jutte  v.  Hutchin-  722,  727,  5  L.  R.  A.  N.  S.  1036. 

son,  189  Pa.  218,  42  Atl.  123;  Evans  New  Jersey. — Tooker  v.  National 

Appeal,  81  Pa.  278,  affirming,  Evans  Sugar  Refining  Co.,  80  N.  J.  Eq.  305, 

v.  Borie,  1  Weekly  Notes  of  Cases  321,  84  Atl.  10. 

127;    Erlanger    v.    New    Sombrero  Oregon. — Wills   v.    Nehalem   Coal 

Phosphate  Co.,    L.    R.   3   App.    Gas.  Co.,  52  Or.   70,  89-90,  96  Pac.  528, 

1218,  1230,   1279,   6  Eng.   Rul.   Cas.  535. 

777,  39  L.  T.  N.   S.  269,  27  W.  R.  United  Kingdom   and   Colonies. — 

65 ;  Lindsay  Petroleum  Co.  v.  Hurd,  Bagnall  v.  Carlton,  L.  R.  6  Ch.  Div. 

L.  R.  5  P.  C.  221,  233,  241.  371,  380 ;  Erlanger  v.  New  Sombrero 

44.  Federal. — American       Ship-  Phosphate   Co.,    L.    R.   3   App.    Cas. 
building  Co.  v.  Commonwealth  S.  S.  1218,   1231,   1279,  6   Eng.   Rul.   Cas. 
Co.,  215  Fed.  Rep.  296,  302,  131  C.  C.  777,  39  L.  T.  N.  S.  269,  27  W.  R.  65. 
A.  596 ;  Alger  v.  Anderson,  78  Fed.  Note  to  Lomita  Land  &  Water  Co. 
Rep.  729,  734.  v.  Robinson,  18  L.  R.  A.  N.  S.  1134.  • 

Massachusetts. — 0 1  d       Dominion          45.  Johnston    v.     Standard     Min. 
Copper,    etc.,    Co.    v.    Bigelow,    203      Co.,  148  U.   S.  360,   370,  37  L.   Ed. 


DEFENSES. 


293 


of  its  failure  to  avail  itself  of  a  reasonable  opportunity  to  ascer- 
tain the  facts.46  Neither  the  company  nor  its  stockholders  are 
required  to  suspect  the  promoter  of  fraud,  or  to  make  inquiries 
as  to  the  truth  of  his  representations,  or  the  honesty  of  his  trans- 
actions with  the  corporation.47 

§  154.  What  is  unreasonable  delay. 

What  amounts  to  an  unreasonable  delay  in  the  assertion  of  the 
plaintiff's  rights  depends  upon  the  circumstances  of  the  particu- 
lar case.48  The  burden  of  proof  is  upon  the  party  asserting 
laches.49 

The  stockholders  are,  after  learning  of  the  fraud,  entitled  to  a 


480,  13  Sup.  Ct.  585 ;  Swift  v.  Smith, 
79  Fed.  Rep.  709,  713,  25  C.  C.  A. 
154,  49  U.  S.  App.  181. 

46.  Hinkley    v.    Sac   Oil   &    Pipe 
Line  Co.,  132  Iowa  396,  409,  107  N. 
W.  629,  634,  119  Am.  St.  Rep.  564, 
citing  cases;  Old  Dominion  Copper, 
etc.,  Co.  v.  Bigelow,  203  Mass.  159, 
201,  89  N.  E.  193,  40  L.  R.  A.  N.  S. 
314;     Erlanger    v.    New    Sombrero 
Phosphate  Co.,   L.    R.   3   App.   Gas. 
1218,  1232,  1240,  1280,  6  Eng.  Rul. 
Cas.  777,  39  L.  T.  N.  S.  269,  27  W. 
R.    65;    Lindsay    Petroleum    Co.    v. 
Kurd,  L.  R.  5  P.  C.  221,  241-242. 

Contra  Wills  v.  Nehalem  Coal  Co., 
52  Or.  70,  90,  96  Pac.  528,  535. 

47.  Hinkley   v.    Sac   Oil   &   Pipe 
Line  Co.,  132  Iowa  396,  409,  107  N. 
W.  629,  634,  119  Am.  St.  R.  564.    See 
Erlanger    v.    New    Sombrero    Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
1248,  6  Eng.  Rul.  Cas.  777,  39  L.  T. 
N.  S.  269,  27  W.  R.  65. 

Cf.  Halstead  v.  Grinnen,  152  U.  S. 
412,  417,  38  L.  Ed.  495,  14  Sup.  Ct. 
641;  Foster  v.  Mansfield,  etc.,  R.  R. 
Co.,  146  U.  S.  88,  99,  36  L.  Ed.  899, 
13  Sup.  Ct.  28. 


See  also  ante,  §  112,  and  post, 
260,  but  see  §  262. 

48.  Twin  Lick  Oil  Co.  v.  Marbury, 
91  U.  S.  587,  592,  23  L.  Ed.  328,  and 
cases  cited. 

Ex-Mission  Land  &  Water  Co.  v. 
Flash,  97  Cal.  610,  629-630,  32  Pac. 
600,  605-606. 

Brehm  v.  Sperry,  Jones  &  Co.,  92 
Md.  378,  405,  48  Atl.  368,  373. 

Nant-Y-Glo  &  Blaina  Ironworks 
Co.  v.  Grave,  L.  R.  12  Ch.  Div.  738, 
748-749 ;  Erlanger  v.  New  Sombrero 
Phosphate  Co.,  L.  R.  3  App.  Cas. 
1218,  1252,  1257,  1259,  1279,  1285,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65 ;  Lindsay  Petroleum 
Co.  v.  Kurd,  L.  R.  5  P.  C.  221,  240; 
Phosphate  Sewage  Co.  v.  Hartmont, 
L.  R.  5  Ch.  Div.  394,  453,  46  L.  J. 
Ch.  661;  Lagunas  Nitrate  Co.  v. 
Lagunas  Syndicate,  1899,  2  Ch.  Div. 
392,  454. 

49.  Erlanger    v.    New    Sombrero 
Phosphate  Co.,   L.   R.  3   App.   Cas. 
1218,  1230,  6  Eng.  Rul.  Cas.  777,  39 
L.  T.  N.  S.  269,  27  W.  R.  65 ;  Lindsay 
Petroleum  Co.  v.  Kurd,  L.  R.  5  P. 
C.  221,  241. 


294 


THE  LAW  OF  PROMOTERS. 


reasonable  time  for  a  more  thorough  investigation  of  the  facts,50 
and  the  plaintiff  will  not  be  charged  with  delay  in  the  assertion  of 
his  rights  during  a  period  when  negotiations  for  a  peaceable  set- 
tlement were  under  way.51 

The  mere  institution  of  a  suit  does  not  necessarily  save  the 
complainant  from  the  charge  of  laches.  If  he  fails  to  diligently 
prosecute  his  suit  the  consequences  are  the  same  as  though  no 
suit  had  been  begun.52 

A  court  of  equity  will  more  readily  declare  the  remedy  to  be 
barred  by  laches  if  the  property  under  consideration*  has  a  specu- 
lative or  fluctuating  value.53 

The  court  will  also  take  into  consideration  the  fact  that  a  cor- 


As  to  pleading  laches,  or  circum- 
stances excusing  an  apparently  un- 
reasonable delay,  see  Lindsay  Pet- 
roleum Co.  v.  Hurd,  L.  R.  5  P.  C. 
221,  241 ;  Wills  v.  Nehalem  Coal  Co., 
52  Or.  70,  90,  96  Pac.  528,  535. 

50.  Ex-Mission    Land    &    Water 
Co.  v.  Flash,  97  Cal.   610,   629-630, 
32   Pac.    600,    605-606;    Erlanger   v. 
New  Sombrero  Phosphate  Co.,  L.  R. 
3  App.  Gas.  1218,  1252,  1285,  6  Eng. 
Rul.  Gas.  777,  39  L.  T.  N.  S.  269,  27 
W.  R.  65,  affirming,  New  Sombrero 
Phosphate  Co.  v.  Erlanger,  L.  R.  5 
Ch.  Div.  73,  117,  25  W.  R.  436;  La- 
gunas  Nitrate  Co.  v.  Lagunas  Syndi- 
cate, 1899,  2  Ch.  Div.  392,  454  (dis- 
senting opinion). 

51.  Fred  Macey  Co.  v.  Macey,  143 
Mich.  138,  153,  106  N.  W.  722,  727, 
5  L.  R.  A.  N.  S.  1036,  (citing  Compo 
v.  Jackson  Iron  Co.,  49  Mich.  39,  12 
N.  W.  901)  ;  Cox  v.  National  Coal  & 
Oil  Investment  Co.,  61  W.  Va.  291, 
311,  312,  56  S.  E.  494,  502,  503;  Er- 
langer v.  New  Sombrero  Phosphate 
Co.,  L.  R.  3  App.  Gas.  1218,  1285,  6 


Eng.  Rul.  Cas.  777,  39  L.  T.  N.   S. 
269,  27  W.  R.  65. 

52.  Johnston  v.  Standard  Min.  Co. 
148  U.  S.  360,  370,  37  L.  Ed.  480,  13 
Sup.  Ct.  585,  and  cases  cited;  Wil- 
lard  v.  Wood,  164  U.  S.  502,  525,  41 
L.  Ed.  531,  17  Sup.  Ct.  176;  O'Brien 
v.  Wheelock,  184  U.  S.  450,  482,  46 
L.  Ed.  636,  22  Sup.  Ct.  354. 

53.  Twin  Lick  Oil  Co.  v.  Marbury, 
91  U.  S.  587,  592-593,  23  L.  Ed.  328 ; 
Hayward  v.  National   Bank,  96  U. 
S.  611,  618,  24  L.  Ed.  855;  Johnston 
v.  Standard  Min.  Co.,  148  U.  S.  360, 
370,  37  L.  Ed.  480,  13  Sup.  Ct.  585; 
Patterson  v.  Hewitt,  195  U.  S.  309, 
321,  49  L.  Ed.  214,  25  Sup.  Ct.  35; 
Sagadahoc   Land  Co.    v.   Ewing,   65 
Fed.  Rep.  702,  13  C.  C.  A.  83,  31  U. 
S.  App.  102 ;  Jesup  v.  Illinois  Cen- 
tral R.  Co.,  43  Fed.  Rep.  483,  503- 
504 ;  Pratt  v.  California  Min.  Co.,  24 
Fed.   Rep.  869,  877-878;   Keelyn  v. 
Strieder,    148    111.    App.    238,    247; 
Brehm   v.   Sperry,  Jones  &  Co.,  92 
Md.  378,  405,  48  Atl.  368,  373. 


DEFENSES.  295 

poration  consisting  of  a  large  body  of  stockholders  is  necessarily 
slow  in  its  proceedings,  and  will  not  too  readily  charge  it  with  un- 
reasonable delay.54 

It  has  been  said  that  a  delay  which  might  be  available  by  way 
of  defense  to  persons  not  under  any  fiduciary  relation  or  obliga- 
tion might  not  be  available  by  way  of  defense  to  those  who  are 
affected  by  a  fiduciary  relation  or  obligation.55  It  must,  on  the 
other  hand,  be  remembered  that  the  law  is  less  tolerant  of  delay, 
and  will  more  readily  sustain  a  defense  of  laches,  in  a  case  where 
the  transaction  is  open  to  criticism  only  because  of  the  confidential 
relation  of  the  parties,  than  in  a  case  of  actual  fraud.56 

§  155.  Persons  whose  knowledge  may  be  charged  to  the  cor- 
poration. 

The  corporation  cannot  ordinarily  be  charged  with  laches 
until  after  it  has  knowledge  of  the  facts  of  which  complaint  is 
made.  A  question  upon  which  there  is  little  satisfactory  authority 
is  that  as  to  the  persons  whose  knowledge  will  start  the  time  run- 
ning against  an  action  by  or  on  behalf  of  the  corporation. 

The  knowledge  of  a  board  of  directors  free  from  the  control  of 
the  guilty  parties  is  the  knowledge  of  the  corporation,57  and  the 

54.  See    Erlanger    v.    New    Som-          56.  See  Hoyt  v.  Latham,  143  U.  S. 
brero  Phosphate  Co.,  L.  R.  3  App.      553,  567,  36  L.  Ed.  259,  12  Sup.  Ct. 
Cas.  1218,  1259,  1280,  1282,  6  Eng.      568. 

Rul.  Cas.  777,  39  L.  T.  N.  S.  269,  27  57.  Lagunas    Nitrate   Co.    v.    La- 

W.  R.  65,  affirming,  New  Sombrero  gunas   Syndicate,   1899,   2  Ch.   Div. 

Phosphate  Co.  v.  Erlanger,  L.  R.  5  392,  464,  but  see  dissenting  opinion 

Ch.  Div.  73,  117,  25  W.  R.  436.  of  Rigby,  L.  J.,  452,  454. 

This   is    particularly   true   where  See    also    Metropolitan    Bank    v.. 

the    corporation    is    forced    to    act  Heiron,  L.  R.  5  Exch.  Div.  319,  325, 

against    the    opposition    of    its    di-  326,  where  notice  brought  home  to 

rectors.    Erlanger  v.  New  Sombrero  the  directors  at  a  board  meeting  was 

Phosphate   Co.,   L.   R.   3  App.   Cas.  held    to    start    the    time    running 

1218,  1259,  1280,  6  Eng.  Rul.  Cas.  though   the   defendant   was   appar- 

777,  39  L.  T.  N.  S.  269,  27  W.  R.  65.  ently  himself  one  of  the  members. 

55.  Lindsay     Petroleum     Co.     v.  of  the  board. 
Kurd,  L.  R.  5  P.  C.  221,  242. 


296  THE  LAW  OF  PROMOTERS. 

corporation  may  no  doubt  be  charged  with  knowledge  of  facts 
formally  disclosed  at  a  stockholders'  meeting  duly  called.58  The 
knowledge  of  a  few  of  the  stockholders  is  not  the  knowledge  of 
all,  nor  the  knowledge  of  the  corporation.59  When  suit  is  brought 
by  a  minority  stockholder  suing  on  behalf  of  the  corporation,  the 
rights  asserted  are  those  of  the  corporation,  and  laches  is  a  de- 
fense if  the  corporation  was  guilty  of  unreasonable  delay,  though 
the  minority  stockholder  himself  acted  with  all  due  diligence  as 
soon  as  he  personally  discovered  the  facts.60  The  minority  stock- 
holder's suit  may  likewise  be  defeated  by  showing  *that  he  was 
personally  guilty  of  laches,  though  there  are  non-complaining 
stockholders  who  had  no  knowledge  of  the  facts  and  who  might 
successfully  maintain  the  suit.61 

It  has  been  held  that  the  commencement  of  an  action  by  a  min- 
ority stockholder  suing  on  behalf  of  himself  and  all  other  stock- 
holders similarly  situated,  saves  all  the  stockholders  on  whose 
behalf  the  action  is  brought  from  a  charge  of  delay  in  commencing 
suit.62 

§  156.  Defense  of  laches  as  depending  upon  the  nature  of  the 

relief  asked. 
The  defense  of  laches  may  be  pleaded  to  any  action  brought 

58.  See    Erlanger    v.    New    Som-  guilty  of  laches  cannot  base  his  suit 
brero  Phosphate  Co.,  L.  R.  3  App.  on    the   objections    of   other    stock- 
Cas.    1218,    1232,    1250,    1258,    1263,  holders    who    were    not    guilty    of 
1286,  6  Eng.  Rul.  Gas.  777,  39  L.  T.  laches.    This  statement  is  no  doubt 
N.  S.  269,  27  W.  R.  65.  correct,  but  the  case  cited,   (Beling 

59.  Erlanger    v.    New    Sombrero  v.  American  Tobacco  Co.,  72  N.  J. 
Phosphate  Co.,   L.   R.   3   App.   Cas.  Eq.  32,  65  Atl.  725),  does  not  seem 
1218,    1232-1233,    1250,    1258,    1263,  to  support  it. 

1280,  6  Eng.  Rul.  Cas.  777,  39  L.  T.  62.  Brinckerhoff   v.   Bostwick,  99 

N.  S.  269,  27  W.  R.  65.  N.  Y.  185,  1  N.  E.  663 ;  MacArdell  v. 

60.  Evans    Appeal,    81    Pa.    278,  Olcott,  62  N.  Y.  App.  Div.  127,  130, 
302,    affirming,    Evans  v.    Borie,    1  70  Supp.  930 ;  Metropolitan  Elevated 
Weekly  Notes  of  Cases,  127.  R.    R.    Co.    v.    Manhattan   Elevated 

61.  See    Cook    on    Corporations,  R.  R.  Co.,  11  Daly  373,  438,  14  Abb. 
(7th  Ed.),   §  733,  where  it  is  said  N.  C.  103. 

that   a   stockholder   who   has   been 


DEFENSES. 


against  the  promoters  in  a  court  of  equity,  whether  it  be  an  action 
for  rescission  or  for  an  accounting  for  profits,63  but  the  defense 
will  be  applied  with  greater  strictness  to  an  action  in  which  a 
rescission  is  asked,  than  to  one  in  which  money  damages  only  are 
sought.  If  the  relief  asked  is  the  mere  recovery  of  money  dam- 
ages or  the  surrender  of  shares  unlawfully  taken  by  the  promoters, 
the  defense  of  laches  will  not  be  readily  sustained  unless  some 
change  of  position  or  prejudice  to  the  defendants'  rights  has  re- 
sulted from  the  delay.64 

§  157.  Delay  as  a  defense  to  an  action  at  law  upon  a  rescission. 
If  the  corporation,  instead  of  bringing  suit  in  equity  for  a 
rescission  of  its  purchase,  gives  notice  of  disaffirmance,  tenders  a 
reconveyance  of  the  property  sold  to  it  by  the  promoters,  and 
proceeds  against -them  in  an  action  at  law  for  the  recovery  of 
the  purchase  price,65  the  doctrine  of  laches  does  not  apply,  but  the 
same  result  is  in  practical  effect  arrived  at  by  the  application  of 
the  rule  that  the  corporation  is  deemed  to  have  ratified  its  pur- 
chase unless  it  disaffirms  promptly  upon  discovering  the  facts.66 
It  must,  as  soon  as  it  learns  of  the  fraud,  determine  whether  or 
not  it  wishes  to  go  on  with  the  transaction.  It  cannot,  after  dis- 


63.  Old    Dominion    Copper,    etc., 
Co.  v.  Bigelow,  203  Mass.  159,  201, 
89  N.  E.  193,  40  L.  R.  A.  N.  S.  314 ; 
Peabody  v.  Flint,  88  Mass.  52,  57; 
Wills  v.  Nehalem  Coal  Co.,  52  Or. 
70,  89-90,  96  Pac.  528,  535;  Bagnall 
v.  Carl  ton,  L.  R.  6  Ch.  Div.  371,  380. 

64.  See  Halstead  v.  Grinnen,  152 
U.    S.   412,   416,    38   L.    Ed.   495,   14 

'Sup.  Ct.  641;  Alsop  v.  Riker,  155  U. 
S.  448,  461,  39  L.  Ed.  218,  15  Sup. 
Ct.  162 ;  Montgomery  Light  &  Power 
Co.  v.  Lahey,  121  Ala.  131,  25  So. 
1006;  Wills  v.  Nehalem  Coal  Co.,  52 
Or.  70,  96  Pac.  528;  Nant-Y-Glo  & 
Blaina  Ironworks  Co.  v.  Grave,  L. 


R.  12  Ch.  Div.  738,  748-749. 

65.  See  post,  §§  169,  194,  241. 

66.  See  Barr  v.  N.  Y.  L.  E.  &  W. 
R.  R.  Co.,  125  N.  Y.  263,  275,  26  N. 
E.  145,  34  N.  Y.  St.  Rep.  743 ;  Getty 
v.   Devlin,   54   N.   Y.   403,  415,   and 
cases  cited ;  Stanley  v.  Luse,  36  Or. 
25,    36,    58    Pac.    75,    7S,    citing    4 
Thompson  on  Corporations,   §  5298. 
See  Lagunas  Nitrate  Co.  v.  Lagunas 
Syndicate,  1899,  2  Ch.  Div.  392,  415- 
416,      432-134 ;      Omnium      Electric 
Palaces,  Ltd.,  v.  Baines,  1914,  1  Ch. 
Div.  332,  82  L.  J.  Ch.  N.  S.  519,  109 
L.  T.  N.  S.  206.     And  see  post,  §§ 
258  and  261. 


298 


THE  LAW  OF  PROMOTERS. 


covering  the  fraud,  await  the  result  of  its  venture,  and  rescind  its 
purchase  if  it  proves  disadvantageous.  If,  however,  the  enter- 
prise becomes  unprofitable  before  the  fraud  is  discovered,  the 
corporation  may  rescind  upon  discovering  the  fraud,  and  its  action 
cannot  be  defeated  by  showing  that  it  would  not  have  rescinded  its 
purchase  had  it  learned  of  the  fraud  while  the  business  was  still 
profitable.67 

§  158.  Effect  of  judgment  for,  or  against,  co-promoter. 

As  promoters  guilty  of  a  fraud  upon  the  corporation  are  joint 
tort  feasors,  a  judgment  in  favor  of  one  promoter  in  an  action 
brought  against  him  by  the  corporation,  is  no  bar  to  a  subsequent 
action  against  the  other  promoters,  though  the  complaint  in  both 
actions  be  upon  the  same  facts,  and  for  the  same  relief.68  A  judg- 
ment recovered  by  the  corporation  against  some  of  the  promot- 
ers is,  for  the  same  reason,  unless  satisfied,  no  bar  to  a  subsequent 
suit  against  other  promoters.69 

§  159.  Defense  of  bankruptcy. 

It  is  held  in  England  that  the  taking  by  a  promoter  of  a  secret 
commission  from  one  selling  property  to  the  corporation,  renders 
the  promoter  liable  for  "  fraud  "  and  for  "  breach  of  trust  "  and 
that  he  is,  therefore,  not  released  from  liability  by  a  discharge  in 
bankruptcy.70 


67.  American  Shipbuilding  Co.  v. 
Commonwealth   S.   S.  Co.,  215  Fed. 
Rep.  296,  302,  131  C.  C.  A.  596. 

68.  Old    Dominion    Copper,    etc., 
Co.  v.  Bigelow,  203  Mass.  159,  203- 
220,  89  N.  E.  193,  40  L.  R.  A.  N.  S. 
314 ;  Bigelow  v.  Old  Dominion  Cop- 
per, etc.,  Co.,  225  U.  S.  Ill,  32  Sup. 
Ct.    641,    56    L.    Ed.    1009,    Am.    & 
Eng.  Ann.  Cas.  1913,  E.  875;   Bige- 
low  v.   Old   Dominion  Copper,  etc., 
Co.,  74  N.  J.  Eq.  457,  516,  et  seq.,  71 
Atl.  153. 


69.  Old    Dominion    Copper,    etc., 
Co.  v.  Bigelow,  203  Mass.  159,  219, 
89  N.  E.  193,  40  L.  R.  A.  N.  S.  314, 
affirmed,   sub  nom.   Bigelow  v.   Old 
Dominion  Copper,  etc.,  Co.,  225  U. 
S.  Ill,  32  Sup.  Ct.  641,  56  L.  Ed. 
1009,   Am.   &  Eng.   Ann.   Cas.   1913, 
E.  875. 

70.  Emma    Silver   Mining   Co.   v. 
Grant,  L.  R.  17  Ch.  Div.  122,  50  L. 
J.  Ch.  449,  cited  in  Ramskill  v.  Ed- 
wards, L.  R.  31  Ch.  Div.  100,  108. 


DEFENSES. 


299 


A  discharge  under  the  bankruptcy  law  of  the  United  States 
releases  a  promoter  from  liability  for  any  claims  that  are  provable 
against  him  in  bankruptcy.71  A  claim  is  provable  against  the 
promoter  in  bankruptcy,  if  it  may  be  founded  upon  a  contract, 
express  or  implied.72  Claims  resting  solely  in  tort  are  not  prov- 
able.78 


71.  Bankruptcy  Act  of  1898,  §  17 ; 
Crawford  v.   Burke,  195  U.  S.  176, 
49  L.  Ed.  147,  25  Sup.  Ct.  9 ;  Tindle 
v.  Birkett,  205  U.  S.  183,  51  L.  Ed. 
762,    27    Sup.    Ct.    493;    Collier    on 
Bankruptcy,  page  401,  et  seq.;  Love- 
land  on  Bankruptcy,  §  785 ;  Reming- 
ton on  Bankruptcy,  §  2783,  et  seq.; 
Black  on  Bankruptcy,  §  743. 

Promoters  do  not  act  in  a  "  fidu- 
ciary capacity  "  within  the  meaning 
of  §  17  of  the  Bankruptcy  Act. 
Chapman  v.  Forsyth,  2  How.  (U. 
S.)  202,  11  L.  Ed.  236;  Neal  v. 
Clark,  95  U.  S.  704,  708;  Henne- 
quin  v.  Clews,  111  U.  S.  676,  679, 
4  Sup.  Ct.  576,  28  L.  Ed.  565;  Up- 
shur  v.  Briscoe,  138  U.  S.  365,  375, 
34  L.  Ed.  931,  11  Sup.  Ct.  313. 

72.  Bankruptcy    Act    of    1898,    § 
63a;  Crawford  v.  Burke,  195  U.  S. 


176,  49  L.  Ed.  147,  25  Sup.  Ct.  9; 
Tindle  v.  Birkett,  205  U.  S.  183,  51 
L.  Ed.  762,  27  Sup.  Ct.  493;  Clarke 
v.  Rogers,  228  U.  S.  534,  57  L.  Ed. 
953,  33  Sup.  Ct.  587;  Collier  on 
Bankruptcy,  pages  386,  870;  Love- 
land  on  Bankruptcy,  §  325 ;  Reming- 
ton on  Bankruptcy,  §  2733;  Black 
on  Bankruptcy,  §  514. 

73.  Collier  on  Bankruptcy,  page 
386;  Loveland  on  Bankruptcy,  §§ 
325,  754 ;  Remington  on  Bankruptcy, 
§  635;  Black  on  Bankruptcy,  §§  514, 
726. 

As  to  whether  a  tort  liability  re- 
duced to  judgment  is  provable,  see 
Collier  on  Bankruptcy,  page  871; 
Loveland  on  Bankruptcy,  §  296; 
Remington  on  Bankruptcy,  §  635; 
Black  on  Bankruptcy,  §  497, 


CHAPTER  IX. 

OF  THE   REMEDIES  OF   THE   CORPORATION. 

Section  160.  Introductory. 

161.  Remedies   in    case   of   unlawful   sale   to   the   corporation   of 
property  purchased  by  promoter  for  his  individual  account. 

162.  Where  promoter  misrepresents  facts. 

163.  Accounting  for  profits. — Rescission   unnecessary. 

164.  Remedies  when  promoter's  profit  taken  in  money. 

165.  Additional  remedies  when  promoter's  profit  taken  in  shares. 

166.  Remedies  when     promoter's  profit  taken  in   bonds,  or  other 
obligations,  of  corporation. 

167.  Remedy  of  rescission.       , 

168.  The  same  subject. — Rescission  of  entire  transaction. 

169.  The  same  subject. — Methods  of   effecting  rescission. 

170.  The  same  subject. — Restoration  of  status  quo. 

171.  Action  for  fraud  and  deceit. 

172.  Election  of  remedies. 

173.  The  same  subject. — No  right  of  election  in  promoter. 

174.  Remedies  of  corporation  where  promoter  receives  secret  com- 
mission or  other  benefit. 

175.  Remedies  in  case  of  fraudulent  representations. 

176.  Liability  of  directors,  officers,  etc. 

177.  Cancellation  of  secret  agreements. 

178.  Adequate  remedy  to  be  freely  granted. 

§  160.  Introductory. 

When  it  has  been  determined  that  a  corporation  has  a  cause 
of  action  against  its  promoters  because  of  secret  profits  taken 
or  frauds  committed  by  them,  the  next  question  to  be  considered 
is  that  as  to  the  remedy  to  be  pursued  by  the  corporation.1  The 

1.  See  note  on  this  question,  Robinson,  18  L.  R.  A.  N.  S.  1122- 
Lomita  Land  &  Water  Co.  v,  1125. 

(300) 


REMEDIES  OF  CORPORATION.  301 

remedies  open  to  the  corporation  necessarily  depend  upon  the 
nature  of  the  acts  complained  of.  The  species  of  promoters' 
fraud  which  in  this  and  in  other  connections  gives  rise  to  the  most 
difficult  questions,  is  that  of  an  unlawful  resale  to  the  corporation, 
at  an  advance,  of  property  purchased  by  the  promoters  for  their 
individual  account. 

§  161.  Remedies  in  case  of  unlawful  sale  to  the  corporation  of 
property  purchased  by  the  promoter  for  his  individual 
account. 

There  has  been  much  confusion  as  to  the  remedies  open  to  the 
corporation  where  the  promoters  have,  without  a  proper  disclo- 
sure, sold  to  it  property  which  they  first  purchased  for  their  in- 
dividual account.  This  is  due,  in  a  large  measure,  to  a  failure  to 
keep  in  mind  the  distinction  between  a  case  where  the  promoters 
purchased  the  property  after  they  had  entered  upon  the  relation  of 
promoters  to  the  corporation,  and  a  case  where  the  promoters  be- 
came the  owners  of  the  property  before  the  promotion  was  un- 
dertaken.2 The  corporation  may,  in  either  case,  according  to  the 
weight  of  authority,  rescind  the  purchase  made  by  it,3  or  sue  the 
promoters  for  damages — that  is  for  the  difference  between  the 
price  which  it  paid  for  the  property  and  the  actual  value  thereof.4 
Whether  the  corporation  may  also  compel  the  promoters  to  ac- 
count for  their  profits  upon  the  resale — that  is  for  the  difference 
between  the  price  they  paid  for  the  property,  and  the  price  at 
which  they  sold  it  to  the  corporation — depends  upon  whether  the 
relation  of  promoter  to  the  corporation  existed  at  the  time  when 
the  original  purchase  was  made. 

2.  For  the  distinction  in  regard  tion  commences,  see  ante,  §§  15-18. 

to  the  disclosure  that  must  be  made  As  to  the  time  at  which  the  pro- 

in  the  two  cases,  see  ante,   §  115.  moter  may  be  deemed  to  have  be- 

For  the  difference  in  the  measure  of  come    the   owner    of    the   property, 

damages  in  the  two  cases,  see  post,  see  ante,  §§  104-108. 

§  264.    As  to  the  moment  when  the  3.  See  post,  §§  167-170. 

relation  of  promoter  to  the  corpora-  4.  See  post,  §  171. 


302 


THE  LAW  OF  PROMOTERS. 


If  the  parties  had  at  the  time  of  the  original  purchase  already 
entered  upon  the  relation  of  promoters  to  the  corporation  they 
were,  because  of  their  fiduciary  relation  to  the  company,  bound 
to  make  the  purchase  for  its  benefit,  and  the  company  is  en- 
titled to  a  conveyance  of  the  property  at  cost.  Any  money  or 
other  thing  of  value,  paid  by  the  corporation  beyond  the  cost  of 
the  property  to  the  promoters — that  is  the  profit  accruing  to 
the  promoters  on  the  resale — may  be  considered  to  have  been  paid 
to  them  without  consideration,  is  in  equity  deemed  to  belong  to 
the  corporation,  and  must  be  accounted  for  to  it.5  If,  however, 
the  promoters  acquired  the  property  sold  to  the  corporation  be- 
fore they  assumed  any  fiduciary  relation  toward  it,  the  corporation 


5.  Alabama. — Moore  v.  Warrior 
Coal  &  Land  Co.,  178  Ala.  234,  59  So. 
219,  Am.  &  Eng.  Ann.  Gas.,  1915  B. 
173. 

Arkansas. — Tegarden  Brothers  v. 
Big  Star  Zinc  Co.,  71  Ark.  277,  281, 
72  S.  W.  989,  991. 

Missouri. — Exter  v.  Sawyer,  146 
Mo.  302,  47  S.  W.  951. 

New  York. — Heckscher  v.  Eden- 
born,  131  App.  Div.  253,  267,  115 
Supp.  673,  followed  in  137  App.  Div. 
899,  122  Supp.  1131,  which  is  re- 
versed, 203  N.  Y.  210,  96  N.  E.  441. 

New  Jersey. — Loudenslager  v. 
Woodbury  Heights  Land  Co.,  58  N. 
J.  Eq.  556,  559-560,  43  Atl.  671; 
Arnold  v.  Searing,  78  N.  J.  Eq.  146, 
78  Atl.  762. 

Wisconsin. — Pietsch  v.  Milbrath, 
123  Wis.  647,  101  N.  W.  388,  102  N. 
W.  342,  68  L.  R.  A.  945,  107  Am.  St. 
Rep.  1017. 

United  Kingdom  and  Colonies. — 
See  dictum  in  Re  Hess  Manufactur- 
ing Co.,  23  Can.  S.  C.  644,  659. 


And  see  the  cases  cited  under  note 
10. 

It  is  said  in  the  recent  case  of 
Omnium  Electric  Palaces,  Ltd.,  v. 
Baines,  1914,  1  Ch.  Div.  332,  343- 
344,  82  L.  J.  Ch.  N.  S.  519,  524,  109 
L.  T.  N.  S.  206,  that  it  is  doubtful 
whether  a  claim  for  profits  can  be 
enforced  against  vendors,  as  against 
whom  rescission  was  quite  possible. 
There  seems  to  be  no  good  reason 
for  such  doubt. 

In  Mangold  v.  Adrian  Irr.  Co.,  60 
Wash.  286,  111  Pac.  173,  the  cor- 
poration had,  by  delaying  until  the 
promoter's  option  had  expired,  suc- 
ceeded in  buying  the  properties  from 
the  vendors  at  the  price  stated  in 
the  options.  It  was  held  that  as  the 
corporation  could  have  compelled 
the  promoter  to  account  for  his 
profits  and  thus  secured  the  prop- 
erty at  the  option  price,  the  pro- 
moter had  no  right  to  complain  of 
its  action  in  the  premises. 


REMEDIES  OF  CORPORATION.  303 

cannot  claim  the  benefit  of  their  purchase.  If  the  promoters,  in 
such  case  improperly  conceal  their  interest  in  the  property,  the 
sale  to  the  corporation  may  at  its  election  be  avoided,6  or  the 
promoters  may  be  sued  for  damages,7  but  the  court  cannot,  by 
compelling  the  transfer  of  the  property  at  a  lesser  price  than  that 
agreed  upon,  in  effect,  make  a  new  contract  for  the  parties.  There 
would,  if  the  property  was  acquired  by  the  promoters  before  the 
fiduciary  relation  was  assumed,  be  no  better  reason  for  compelling 
them  to  convey  it  to  the  corporation  at  cost  than  at  any  other 
price  arbitrarily  fixed  by  the  court.8 

This  distinction  is  well  stated  by  Lord  Justice  Cotton  in  the 
Ambrose  Lake  Tin  &  Copper  Mining  Co.  case,9  where  he,  after 
pointing  out  that  the  vice  warden  had  in  that  case  charged  the 
promoters  with  the  difference  between  what  they  had  paid  for 
the  property,  and  the  value  of  the  shares  which  they  had  received 
in  payment  therefor  from  the  corporation,  said,  "  The  principle 
of  the  order  must  be  this,  that  the  company  are  at  liberty  to 
treat  these  persons  as  trustees  of  the  property  for  the  company, 
and,  treating  them  as  trustees,  to  allow  them  only  what  they 
paid  for  the  property,  and  if  they  got  anything  else  out  of  the 
coffers  of  the  company,  to  make  them  account  for  that.  Neither 
on  principle  nor  on  authority  can  that  be  maintained,  unless  at 
the  time  when  the  so-called  vendor  acquired  the  property  he  either 

6.  See  post,  §  167.  Ch.  Div.  221,  229,  affirmed,  L.  R.  29 

7.  See  post,  §  171.  Ch.  Div.  795,  812,  affirmed,  sub  nom. 

8.  Insurance    Press    v.    Montauk  Bentinck  v.  Fenn,  L.  R.  12  App.  Cas. 
Wire  Co.,  103  N.  Y.  App.  Div.  472,  652.    See  also  Burland  v.  Earle,  1902 
478,  et  seq.,  93  Supp.  134 ;  Spaulding  App.  Cas.  83,  98-99. 

v.  North  Milwaukee  Town-Site  Co.,  The  promoters  may,  under  some 
106  Wis.  481,  492,  81  N.  W.  1064,  circumstances,  be  compelled  to  give 
1066 ;  In  re  Hess  Manufacturing  Co.,  the  corporation  the  benefit  of  a  pur- 
23  Can.  S.  C.  644,  661,  663;  In  re  chase  made  before  the  fiduciary  re- 
Ambrose  Lake  Tin  and  Copper  Min-  lation  existed.  See  post,  §§  162, 
ing  Co.,  L.  R.  14  Ch.  Div.  390,  398-  264,  also  ante,  §  108,  also  §  16. 
399 ;  In  re  Cape  Breton  Co.,  L.  R.  26  9.  L.  R.  14  Ch.  Div.  390,  398. 


304  THE  LAW  OF  PROMOTERS. 

acquired  it  for  the  company,  or  was  in  such  a  position  of  fiduci- 
ary relation  to  the  company  that  any  purchase  made  by  him  of 
property  available  for  the  company  must  be  considered  as  a  pur- 
chase made  by  him  as  a  trustee  for  the  company.     In  that  case 
what  the  Court  does  is  to  go  back  to  the  original  purchase  made 
by  the  person  who  afterwards  purports  to  sell  to  the  company  at 
an  advanced  price,  and  to  say  this  was  already  the  company's 
at  the  price  which  you  originally  gave  for  it  when  you  were  a 
trustee  for  the  company.     That  price  you  are  entitled  to  receive 
out  of  the  coffers  of  the  company,  and  anything  else  is  a  sum  paid 
to  you  for  nothing,  which  you  are  not  entitled  to  retain.     But 
here,  as  far  as  I  understand  the  evidence  and  the  judgment,  there 
is  no  ground  for  suggesting  that  at  the  time  when  Mr.  Moss  ac- 
quired his  interest  in  the  cost-book  mine  he  was  acquiring  it  as 
a  trustee  for  the  company,  nor  do  I  understand  that  is  suggested 
as  regards  the  other  partners  in  the  cost-book  mine.     The  sug- 
gestion is  that  they  bought,  being  both  owners  of  the  mine  and 
trustees  of  the  company ;  that  they  could  not  legally  do  this ;  and 
that,  therefore,  the  company,  not  seeking  to  set  aside  the  trans- 
action, may  say,  '  We  will  take  this  at  its  fair  value,  and  make 
you  account  for  the  difference.'     How  can  that  be  done?     I  can 
quite  understand  an  action  to  set  aside  the  contract  altogether, 
but  that  is  not  the  course  adopted  by  the  company.     I  can  see 
no  ground  either  on  principle  or  authority  on  which  the  company 
can  say,  not  seeking  to  set  aside  the  contract,  '  We  will  hold  you 
as  passing  this  to  the  company,  not  because  you  originally  ac- 
quired it  for  the  company,  but  because  you  entered  into  a  contract 
to  sell  to  the  company  which  is  not  binding,  and  therefore  we 
make  another  contract  to  take  it  from  you  for  what  it  originally 
cost  you,  making  you  account  for  whatever  else  under  that  invalid 
contract  you  stipulated  should  be  paid  for  it.'     I  am  of  opinion 
that  this  cannot  be  maintained,  and  therefore  the  order  we  have 
to  deal  with  cannot  stand." 


REMEDIES  OF  CORPORATION. 


305 


The  distinction  here  made,  though  well  established,10  has  some- 
times been  overlooked.11 


10.  Federal. — Central  Trust  Co. 
v.  East  Tennessee  Land  Co.,  116 
Fed.  Rep.  743,  748. 

Connecticut. — Yale  Gas  Stove  Co. 
v.  Wilcox,  64  Conn.  101,  116-119, 
125,  29  Atl.  303,  25  L.  R.  A.  90,  42 
Am.  St.  Rep.  159,  47  Am.  &  Eng. 
Corp.  Cas.  647. 

Illinois.— Ely  v.  Hanford,  65  111. 
267. 

Massachusetts. — Parker  v.  Nicker- 
son, 137  Mass.  487,  497;  Old  Do- 
minion Copper,  etc.,  Co.  v.  Bigelow, 
188  Mass.  315,  321,  74  N.  E.  653, 
108  Am.  St.  Rep.  479 ;  same  v.  same, 
203  Mass.  159,  202,  89  N.  E.  193,  40 
L.  R.  A.  N.  S.  314. 

New  Jersey. — Bigelow  v.  Old  Do- 
minion Copper,  etc.,  Co.,  74  N.  J. 
Eq.  457,  503-504,  71  Atl.  153. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  79-81,  96  Pac.  528, 
532. 

Pennsylvania. — McElhenny's  A  p- 
peal,  61  Pa.  188,  195 ;  Densmore  Oil 
Co.  v.  Densmore,  64  Pa.  43,  49-50. 

•  United  Kingdom  and  Colonies. — 
In  re  Cape  Breton  Co.,  L.  R.  26  Ch. 
Div.  221,  224,  230,  affirmed,  L.  R.  29 
Ch.  Div.  795,  803-806,  811,  affirmed, 
sub  now.  Bentinck  v.  Fenn,  L.  R.  12 
App.  Cas.  652,  658-659;  Tyrrell  v. 
Bank  of  London,  10  H.  L.  Cas.  26, 
52-53,  11  Eng.  Rep.  934;  Erlanger 
v.  New  Sombrero  Phosphate  Co.,  L. 
Jl.  3  App.  Cas.  1218,  1234-1235,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65;  Ladywell  Mining 
Co.  v.  Brookes,  L.  R.  34  Ch.  Div. 
398,  409-410,  affirmed,  L.  R.  35  Ch. 
Div.  400,  409-415,  17  Am.  &  Eng. 


Corp.  Cas.  22;  Lydney  &  Wigpool 
Iron  Ore  Co.  v.  Bird,  L.  R.  33  Ch. 
Div.  85,  94,  24  Am.  &  Eng.  Corp. 
Cas.  23 ;  In  re  Olympia,  Ltd.,  1898,  2 
Ch.  Div.  153,  170,  affirmed,  sub  nom. 
Gluckstein  v.  Barnes,  1900,  App.  Cas. 
240 ;  In  re  Lady  Forrest  Gold  Mine, 
Ltd.,  1901,  1  Ch.  Div.  582;  In  re 
Hess  Manufacturing  Co.,  23  Can.  S. 
C.  644 ;  Highway  Advertising  Co.  v. 
Ellis,  7  Ont.  Law  Rep.  504,  510. 

11.  Camden  Land  Co.  v.  Lewis, 
101  Me.  78,  95,  63  Atl.  523,  530, 
quoted  ia  Mason  v.  Carrothers,  105 
Me.  392,  402,  74  Atl.  1030,  1034,  also 
in  Mangold  v.  Adrian  Irr.  Co.,  60 
Wash.  286,  111  Pac.  173.  See  also 
In  re  Leeds  &  Hanley  Theatres  of 
Varieties,  1902,  2  Ch.  Div.  809; 
Stratford  Fuel  Ice  C.  &  C.  Co.  v. 
Mooney,  21  Ont.  L.  R.  426;  see  also 
Pittsburg  Mining  Co.  v.  Spooner,  74 
Wis.  307,  320,  42  N.  W.  259,  262,  17 
Am.  St.  Rep.  149,  24  Am.  &  Eng. 
Corp.  Cas.  1,  quoting  from  Parker 
v.  Nickerson,  112  Mass.  195,  196. 
Any  inaccuracy  in  the  statement 
quoted  is,  however,  cured  by  Parker 
v.  Nickerson,  137  Mass.  487,  497. 

The  dictum  in  Getty  v.  Devlin,  54 
N.  Y.  403,  412,  quoted  in  Ex-Mission 
Land  &  Water  Co.  v.  Flash,  97  Cal. 
610,  635,  32  Pac.  600,  607,  appar- 
ently refers  to  a  case  where  the  sub- 
scribers "  agree  jointly  and  for 
their  mutual  benefit  and  advantage  " 
to  make  the  purchase. 

It  is  to  be  regretted  that  the 
courts  have  not  differentiated  be- 
tween the  words  "  damages "  and 
"profits"  using  the  one  in  the 


306 


THE  LAW  OF  PROMOTERS. 


§  162.  Where  promoter  misrepresents  facts. 

The  promoter  may  be  compelled  to  account  for  the  difference 
between  the  price  he  paid  for  the  property  and  the  price  he  re- 
ceived from  the  corporation,  though  he  owned  the  property  before 
he  entered  upon  the  relation  of  promoter  to  the  corporation,  if  he 
represents  to  the  corporation,  or  to  the  subscribers  for  its  shares, 
that  he  acted  for  it  when  making  the  original  purchase,12  or  that 


strict  sense  of  the  injury  suffered 
by  the  corporation,  i.  e.,  the  differ- 
ence between  the  price  paid  by  it 
and  the  actual  value  of  the  prop- 
erty at  the  time,  and  the  other  as 
referring  to  the  gains  or  profits  re- 
tained by  the  promoter,  i.  e.,  the 
difference  between  what  he  paid  for 
the  property  and  what  he  charged 
the  corporation  therefor.  See  per- 
haps, Leeds  &  Hanley  Theatres  of 
Varieties,  1902,  2  Ch.  809,  814-815. 
The  courts,  have  not,  however, 
differentiated  these  terms.  In  re 
Cape  Breton  Co.,  L.  R.  29  Ch.  Div. 
795,  805,  see  also  810,  affirmed,  suit 
nom.  Bentinck  v.  Fenn,  L.  R.  12 
App.  Gas.  652,  Cotton,  L.  J.,  says: 
"What  is  really  profit  made  by  a 
trustee?  It  is  the  difference  be- 
tween the  value  of  the  property  at 
the  time  of  the  purchase  being  made 
t>y  the  company,  and  the  price  which 
the  company  gave.  It  is  not  the 
difference  between  the  price  that 
the  trustee  gave  when  he  was  in  no 
way  a  trustee  for  the  company  and 
that  which  he  got  from  the  com- 
pany." Quoted  in  Ladywell  Mining 
Co.  v.  Brookes,  L.  R.  34  Ch.  Div. 
398,  412. 

See   also    Old    Dominion   Copper, 
etc.,  Co.  v.  Bigelow,  203  Mass.  159, 


202,  89  N.  E.  193,  40  L.  R.  A.  N.  S. 
314. 

The  word  "profit"* is  perhaps 
used  in  the  sense  of  "  damages  "  in 
Hay  ward  v.  Leeson,  176  Mass.  310, 
321,  57  N.  E.  656,  49  L.  R.  A.  725, 
and  in  Heckscher  v.  Edenborn,  131 
N.  Y.  App.  Div.  253,  267,  115  Supp. 
673,  (followed,  137  N.  Y.  App.  Div. 
899,  122  Supp.  1131,  reversed,  203 
N.  Y.  210,  96  N.  E.  441),  and  per- 
haps in  Parker  v.  Nickerson,  112 
Mass.  195,  196,  quoted  in  Pittsburg 
Mining  Co.  v.  Spooner,  74  Wis.  307, 
320,  42  N.  W.  259,  262,  17  Am.  St. 
149,  24  Am.  &  Eng.  Corp.  Cas.  1. 

12.  Simons  v.  Vulcan  Oil  &  Min- 
ing Co.,  61  Pa.  202,  217,  218,  100 
Am.  Dec.  628;  Densmore  Oil  Co.  v. 
Densmore,  64  Pa.  43,  50-51;  Mc- 
Elhenny's  Appeal,  61  Pa.  188,  195- 
196.  See  ante,  §  108. 

It  has  been  said  that  a  party 
guilty  of  false  representations  will. 
if  possible,  be  compelled  to  make 
his  representations  good.  See  Old 
Dominion  Copper,  etc.,  Co.  v.  Bige- 
low, 188  Mass.  315,  321-322,  74  N. 
E.  653,  108  Am.  St.  Rep.  479;  Puls- 
ford  v.  Richards,  17  Beav.  87,  95. 
And  see  post,  §.175. 

It  is  said  in  Re  Hess  Manufactur- 
ing Co.,  23  Can.  S.  C.  644,  659,  that 


REMEDIES  OF  CORPORATION. 


307 


he  is  selling  the  property  to  the  corporation  at  its  cost  to  him,13 
or  that  he  is  deriving  no  personal  profit  from  the  transaction,14 
or  if  his  solicitations  for  subscriptions  are  in  the  form  of  an  in- 
vitation to  join  in  the  purchase  of  the  property.15  The  promoter 
may  likewise  be  compelled  to  account  for  the  difference  between 
the  price  paid  by  the  company,  and  the  cost  of  the  property  to 
him,  if  after  making  a  contract  for  its  purchase,  he  con- 
ceals his  personal  interest  in  the  transaction,  and  leads  the 
company  to  believe  that  it  is  purchasing  directly  from  his  ven- 
dor.16 


the  promoter  may  perhaps  be  made 
to  account  for  his  profits,  if  he  ac- 
quires property  ostensibly  for  the 
company  from  a  vendor  who  is  by 
the  terms  of  the  bargain  to  be  paid 
by  the  company  when  it  comes  into 
existence.  See  also  Alexandra  Oil 
&  Dev.  Go.  v.  Cook,  11  Ont.  W. 
R.  1054,  affirming,  10  Ont.  W.  R. 
781,  also  Erlanger  v.  New  Sombrero 
Phosphate  Co.,  L.  R.  3  App.  Cas. 
1218,  1267,  6  Eng.  Rul.  Cas.  777,  39 
L.  T.  N.  S.  269,  27  W.  R.  65.  And 
see  Tooker  v.  National  Sugar  Re- 
fining Co.,  80  N.  J.  Eq.  305,  84  Atl. 
10.  See  ante,  §§  16,  74. 

13.  Federal. — Walker  v.  Pike 
County  Land  Co.,  139  Fed.  Rep.  609, 
613-614,  71  C.  C.  A.  593. 

California. — Burbank  v.  Dennis, 
101  Cal.  90,  35  Pac.  444. 

New  York. — Getty  v.  Devlin,  54 
N.  Y.  403,  411. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  80,  96  Pac.  528,  532. 

Pennsylvania. — Simons  v.  Vulcan 
Oil  &  Mining  Co.,  61  Pa.  202,  217, 
100  Am.  Dec.  628 ;  Densmore  Oil  Co. 
v.  Densmore,  64  Pa.  43,  50-51. 

Wisconsin. — Franey  v.  Warner,  96 


Wis.  222,  235,  71  N.  W.  81,  85,  fol- 
lowed in  Hebgen  v.  KoefHer,  97  Wis. 
313,  320,  72  N.  W.  745,  747-748; 
Pittsburg  Mining  Co.  v.  Spooner,  74 
Wis.  307,  42  N.  W.  259,  17  Am.  St. 
Rep.  149,  24  Am.  &  Eng.  Corp.  Cas.  1. 

United  Kingdom  and  Colonies. — 
Hichens  v.  Congreve,  4  Sim.  420. 

And  see  ante,  §  108. 

14.  See    Franey    v.    Warner,    96 
Wis.  222,  235,  71  N.  W.  81,  85,  fol- 
lowed in  Hebgen  v.  KoefHer,  97  Wis. 
313,  320,  72  N.  W.  745,  747-748. 

And  see  ante,  §  108. 

15.  Wiano  Land  &  Improvement 
Co.   v.   Webster,   75  Mo.   App.  457; 
Garrett  v.  Wannfried,  67  Mo.  App. 
437;  Getty  v.  Devlin,  54  N.  Y.  403, 
412 ;  Franey  v.  Warner,  96  Wis.  222, 
235,   71   N.   W.   81,   85,  followed  in 
Hebgen  v.  Koeffler,  97  Wis.  313,  320, 
72  N.  W.  745,  747. 

Cover's  Case,  L.  R.  1  Ch.  Div. 
182,  188. 

And  see  ante,  §  108. 

16.  Plaquemines    Tropical    Fruit 
Co.  v.  Buck,  52  N.  J.  Eq.  219,  236- 
237,   27   Atl.    1094,   44   Am.   &   Eng. 
Corp.   Cas.   686. 

Second  Nat'l  Bank  v.  Greenville 


308  THE  LAW  OF  PROMOTERS. 

If  the  promoter,  while  admitting  that  he  is  deriving  a  profit 
from  the  sale  to  the  corporation,  misstates  the  cost  of  the  prop- 
erty to  him,  his  purchase  cannot,  if  made  before  he  entered  upon 
the  relation  of  promoter  to  the  corporation,  be  treated  as  made 
for  the  benefit  of  the  corporation,  but  he  may  be  compelled  to 
account  for  the  difference  between  the  price  which  he  represented 
that  he  paid  for  the  property  and  the  amount  that  he  actually 
paid  therefor,  that  is  for  the  amount  of  his  secret  profit  upon 
the  transaction.17  This  measure  of  recovery  can  also  be  sustained 
on  the  theory  that  the  promoter,  having  repres*ented  that  he  is 
selling  to  the  corporation  at  a  stated  price  above  cost,  should 
be  compelled  to  make  that  representation  good.18 

§  163.  Accounting  for  profits.     Rescission  unnecessary. 

As  an  action  to  compel  the  promoter  to  account  for  the  differ- 
ence between  the  cost  of  the  property  to  him  and  the  price  he 
received  therefor  from  the  corporation,  proceeds,  not  upon  a  dis- 
affirmance,  but  upon  an  affirmance  of  the  company's  purchase,  it 
need  not,  as  a  condition  to  maintaining  such  suit,  rescind  its  pur- 
chase or  offer  to  reconvey  the  property  to  the  promoter.19 

S.  P.  S.  F.  P.  Co.,  23  Ohio  C.  C.  274,  low,  188  Mass.  315,  320-321,  74  N. 

280;    Hebgen    v.    Koeffler,   97    Wis.  E.  653,  108  Am.  St.  Rep.  479.     See 

313,  72  N.  W.  745;  Zinc  Carbonate  also   Johnson   v.    Sheridan   Lumber 

Co.  v.  First  National  Bank,  103  Wis.  Co.,   51    Or.   35,    93    Pac.   470,   and 

125,   79   N.   W.   229,   74  Am.   St.   R.  Beck  v.  Kantorowicz,  3  K.  &  J.  230. 

845 ;  Franey  v.  Warner,  96  Wis.  222,  And  see  cases  cited  under  note  13, 

235,  71  N.   W.  81,   85.  supra. 

In  re  Leeds  &  Hanley  Theatres  of  18.  See  post,  §  175,  and  see  note 

Varieties,  1902,  2  Ch.  Div.  809,  827,  12,  supra. 

et.    seq.;    Hichens    v.    Congreve,    4  19.  Federal. — Yeiser     v.     U.      S. 

Sim.  420,  and  see  same  v.  same,  1  Board  &  Paper  Co.,  107  Fed.  Rep. 

R.  &  M.  150,  and  same  v.  same,  4  340,  349,  46  C.  C.  A.  567,  52  L.  R. 

Russ.  562.  A.  724. 

And  see  ante,  §  108.  Alabama. — Moore  v.  Warrior  Coal 

17.  Gluckstein    v.    Barnes,    1900,  &  Land  Co.,  178  Ala.  234,   59   So. 

App.  Cas.  240,  affirming,  In  re  Olym-  219,  Am  &  Eng.  Ann.  Gas.,  1915  B. 

pia,  Ltd.,  1898,  2  Ch.  Div.  153;  Old  173. 

Dominion  Copper,  etc.,  Co.  v.  Bige-  California. — Ex-Mission    Land    & 


REMEDIES  OF  CORPORATION.  309 

§  164.  Remedies  when  promoter's  profit  is  taken  in  money. 

When  it  has  been  determined  that  the  promoter  is,  under  the 
circumstances  of  a  particular  case,  liable  to  account  to  the  corpo- 
ration for  the  amount  of  the  profit  gained  by  him  upon  a  sale  of 
property  to  the  corporation,  there  is,  if  the  profit  is  taken  in 
money,  little  more  to  be  said.  The  promoter  will  be  compelled  to 
account  to  the  corporation  for  the  difference  between  the  net  cost 
of  the  property  to  him,  and  the  price  at  which  he  sold  it  to  the 
corporation,  deducting  the  cost  of  carrying  the  property  and 
other  legitimate  expenses  incurred  in  relation  thereto.  Some  au- 
thorities also  allow  the  promoter  the  expenses  of  the  promotion 
and  reasonable  compensation  for  his  services.20  The  propriety 
of  allowing  a  promoter  who  takes  a  secret  profit,  compensation 
for  his  services  upon  the  promotion  is,  unless  it  clearly  appears 
that  he  acted  without  dishonest  intent,  open  to  very  serious  ques- 
tion. 

§  165.  Additional  remedies  when  promoter's  profit  is  taken  in 

shares. 
There  are,  if  the  promoter's  secret  profit  is  taken  in  shares,  a 

Water  Co.  v.  Flash,  97  Cal.  610,  636,  N.  J.  Eq.  305,  321-322,  84  Atl.  10. 

32  Pac.  600,  607.  New     York.— Continental     Securi- 

Connecticut. — Yale  Gas  Stove  Co.  ties  Co.  v.  Belmont,  206  N.  Y.  7,  99 

v.  Wilcox,  64  Conn.  101,  121-122,  29  N.  E.  138,  51  L.  R.  A.  N.  S.  112,  Am. 

Atl.  303,  25  L.  R.  A.  90,  42  Am.  St.  &    Eng.    Ann.    Cas.,    1914    A.    777 ; 

Rep.  159,  47  Am.  &  Eng.  Corp.  Cas.  Colton  Improvement  Co.  v.  Richter, 

647.  26  Misc.  26,  32,  55  Supp.  486. 

Massachusetts. — 0 1  d       Dominion  Oregon. — Wills   v.    Nehalem   Coal 

Copper,    etc.,    Co.    v.    Bigelow,    188  Co.,  52  Or.  70,  81,  96  Pac.  528,  532. 

Mass.   315,   321,   74   N.   E.   653,   108  United  Kingdom  and  Colonies.— 

Am.  St.  Rep.  479.  Gluckstein    v.    Barnes,    1900,    App. 

Michigan. — Cuba    Colony    Co.    v.  Cas.     240,     249,     254;     Bentley     v. 

Kirby,  149  Mich.  453,  457,  112  N.  W.  Craven,  18  Beav.  75,  78 ;  Lydney  & 

1133,  1135,  and  cases  cited.  Wigpool  Iron  Ore  Co.  v.  Bird,  L.  R. 

New  Jersey. — Arnold   v.   Searing,  33  Ch.  Div.  85,  94,  24  Am.  &  Eng. 

78  N.  J.   Eq.  146,   162-163,  78  Atl.  Corp.  Cas.  23,  and  cases  cited. 

762,  769,   and  cases  cited.     Tooker  20.  See  authorities  cited,  ante,  § 

v.  National  Sugar  Refining  Co.,  80  85,  and  see  post,  §  266. 


310 


THE  LAW  OF  PROMOTERS. 


number  of  remedies  open  to  the  corporation.  If  the  promoter  has 
sold  the  shares  he  may  be  compelled  to  account  to  the  corpora- 
tion for  the  proceeds  thereof.21  If  the  shares  are  still  in  the 
hands  of  the  promoter,22  or  of  any  person  other  than  an  innocent 


21.  Federal. — Chandler  v.  Bacon, 
30  Fed.  Rep.  538,  540. 

Illinois. — Mississippi  Lumber  Co. 
v.  Joice,  176  111.  App.  110,  122. 

Maine. — Camden  Land  Co.  v. 
Lewis,  101  Me.  78,  95,  63  Atl.  523, 
530. 

Massachusetts. — Hayward  v.  Lee- 
son,  176  Mass.  310,  322,  57  N.  E. 
656,  49  L.  R.  A.  725. 

Washington. — Mangold  v.  Adrian 
Irr.  Co.,  60  Wash.  286,  111  Pac.  173. 

United,  Kingdom  and  Colonies. — 
Carling's  Case,  L.  R.  1  Ch.  Div.  115, 
126 ;  Pearson's  Case,  L.  R.  5  Ch.  Div. 
336,  341,  affirming,  L.  R.  4  Ch.  Div. 
222;  Ex  parte  Theys,  L.  R.  22  Ch. 
Div.  122,  126. 

If  the  corporation  elects  to  sue 
for  the  proceeds  of  the  sale  of  the 
shares,  it  cannot  recover  inter- 
est prior  to  the  date  of  such  sale. 
Mississippi  Lumber  Co.  v.  Joice,  176 
111.  App.  110,  122-3. 

22.  Federal. — Davis  v.  Las  Ovas 
Co.,  227  U.  S.  80,  33  Sup.  Ct.  197,  57 
L.  Ed.  426,  affirming,  Las  Ovas  Co. 
v.  Davis,  35  App.  Gas.  Dist.  of  Col. 
372;  Yeiser  v.  United  States  Board 
&  Paper  Co.,  107  Fed.  Rep.  340,  344, 
349,  46  C.  C.  A.  567,  52  L.  R.  A.  724 ; 
Chandler    v.    Bacon,    30    Fed.    Rep. 
538,    540;     Dunlap    v.     Twin    City 
Power  Co.,  226  Fed.  Rep.  161,  —  C. 
C.  A.  — . 

Alabama. — Moore  v.  Warrior  Coal 
&  Land  Co.,  178  Ala.  234,  59  So.  219, 
Am.  &  Eng.  Ann.  Gas.  1915  B.  173. 


Maine. — Camden  Land  Co.  v. 
Lewis,  101  Me.  78,  95,  63  Atl.  523, 
530. 

Massachusetts. — Hayward  v.  Lee- 
son,  176  Mass.  310,  322,  57  N.  E. 
656,  49  L.  R,  A.  725. 

Michigan. — Cuba  Colony  Co.  v. 
Kirby,  149  Mich.  453,  112  N.  W.  1133. 

Minnesota. — Gere  v.  Dorr,  114 
Minn.  240,  130  N.  W.  1022. 

Missouri. — See  Vogeler  v.  Punch, 
205  Mo.  558,  574,  103  S.  W.  1001. 

New  Jersey. — Plaquemines  Tropi- 
cal Fruit  Co.  v.  Buck,  52  N.  J.  Eq. 
219,  27  Atl.  1094,  44  Am.  &  Eng. 
Corp.  Gas.  686,  cited  in  Arnold  v. 
Searing,  78  N.  J.  Eq.  146,  162,  78 
Atl.  762,  768. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  81,  86,  96  Pac.  528, 
533,  536. 

Pennsylvania. — Mackey  Baking 
Co.  v.  Mackey,  19  Pa.  Dist.  Ct.  893. 

Virginia. — Richlands  Oil  Co.  v. 
Morriss,  108  Va.  288,  61  S.  E.  762. 

Washington. — Mangold  v.  Adrian 
Irr.  Co.,  60  Wash.  286,  111  Pac.  173. 

United  Kingdom  and  Colonies. — 
Pearson's  Case,  L.  R.  5  Ch.  Div.  336, 
341,  affirming,  L.  R.  4  Ch.  Div.  222; 
Carling's  Case,  L.  R.  1  Ch.  Div.  115, 
126;  Eden  v.  Ridsdales  Railway 
Lamp  &  Lighting  Co.,  L.  R.  23  Q. 
B.  Div.  368,  371,  372;  Nant-Y-Glo 
&  Blaina  Ironworks  Co.  v.  Grave,  L. 
R.  12  Ch.  Div.  738,  747. 

In  Plaquemines  Tropical  Fruit 
Co.  v.  Buck,  52  N.  J.  Eq.  219,  240, 


REMEDIES  OF  CORPORATION. 


311 


holder  for  value,23  the  corporation  may  obtain  their  surrender 
or  cancellation  24  unless  injury  to  the  rights  of  creditors  would 
result  therefrom.25 

The  corporation  may,  if  it  so  elects,  instead  of  proceeding 
against  the  promoter  for  a  surrender  or  cancellation  of  his  shares,, 
or  for  an  accounting  for  the  proceeds  of  the  sale  thereof,  sue  the 
promoter  for  the  damages  caused  to  it  by  the  unlawful  taking  of 
the  shares,  that  is  for  the  sum  which  it  lost  by  reason  of  being  de- 


27  Atl.  1094,  44  Am.  &  Eng.  Corp. 
Cas.  686,  a  temporary  injunction 
was  granted  restraining  the  defend- 
ants pendente  lite  from  disposing  of, 
or  voting  their  shares;  cited  In 
Arnold  v.  Searing,  78  N.  J.  Eq.  146, 
162,  78  Atl.  762,  768.  See  also  Gere 
v.  Dorr,  114  Minn.  240,  130  N.  W. 
1022,  and  Wills  v.  Nehalem  Coal  Co., 
52  Or.  70,  75,  96  Pac.  528,  530.  ' 

As  to  the  defendants'  damages  in 
case  such  injunction  is  held  to  have 
been  unjustified,  see  Joyce  on  In- 
junctions, §  195. 

If  the  shares  have  been  disposed 
of,  the  promoter  may  be  compelled 
to  replace  them  out  of  other  shares 
of  the  company,  then  in  his  hands. 
Emery  v.  Parrott,  107  Mass.  95,  104. 

It  is  held,  in  one  case,  that  the 
complaint  must  allege  that  the  de- 
fendant is  still  in  possession  of  the 
shares.  Brehm  v.  Sperry,  Jones  & 
Co.,  92  Md.  378,  407,  48  Atl.  368, 
374. 

In  Kennedy  Drug  Co.  v.  Keyes, 
60  Wash.  337.  Ill  Pac.  175,  the  evi- 
dence showed  that  the  defendant 
had  without  consideration  appro- 
priated to  himself  more  than  half 
the  stock  of  the  corporation,  and 
having  thus  obtained  control,  was 


so  mismanaging  the  company  that 
insolvency  was  imminent.  The  Su- 
preme Court  affirmed  an  order  ap- 
pointing a  receiver. 

23.  Paducah   Land,  Coal  &  Iron 
Co.  v.  Mulholland,  15  Ky.  Law  Rept 
22,   24   S.   W.   624;   Mason   v.   Car- 
rothers,  105  Me.  392,  74  Atl.  1030; 
Tooker  v.  National  Sugar  Refining 
Co.,  80  N.  J.  Eq.  305,  323,  84  Atl.  10. 

It  has  been  said  in  a  somewhat, 
different  connection,  that  mere- 
knowledge  of  the  fact  that  the  pro- 
moters sold  their  property  to  the 
corporation  at  an  advance,  is  not  of 
itself  suflicient  to  put  a  third  per- 
son on  notice  that  the  promoters  had 
fraudulently  represented  to  the  sub- 
scribers that  the  corporation  was; 
obtaining  the  property  at  cost 
Cranston  v.  Bank  of  State  of 
Georgia,  112  Ga.  617,  37  S.  E.  875". 

24.  It  is  held   in  Tooker  v.   Na- 
tional Sugar  Refining  Co.,  80  N.  J. 
Eq.  305,  323,  84  Atl.  10,  that  divi- 
dends   paid    more    than    six    years 
prior  to  the  commencement  of  the 
suit  cannot  be  recovered. 

25.  Tooker  v.  National  Sugar  Re- 
fining Co.,  80  N.  J.  Eq.  305,  330,  84 
Atl.  10. 


312 


THE  LAW  OF  PROMOTERS. 


prived  of  the  power  of  allotting  the  shares  to  other  persons.26 
The  measure  of  such  damage  would  in  the  ordinary  case  be  the 
value  of  the  shares  at  the  time  of  their  taking,  but  if  the  shares 
were  taken  at  a  time  when  the  corporation  was  not  yet  launched 
into  being  and  the  shares  had  as  yet  no  value,  the  promoter  may  be 
charged  with  the  value  of  the  shares  at  some  future  date,27  and  he 
may,  according  to  some  English  authorities,  be  held  for  the  highest 
value  of  the  shares  during  the  period  that  they  were  held  by  him.28 
Shares  unlawfully  taken  by  the  promoter  cannot,  as  already 
intimated,  be  cancelled  after  they  have  come  into  the  haAds  of  an 
innocent  holder,  but  if  the  shares  have  been  pledged  as  security  for 
a  loan,  the  corporation  may  pay  the  amount  of  the  loan,  cancel 
the  shares,  and  recover  from  the  promoter  the  moneys  paid  by 
it  to  the  pledgee.29 


26.  Federal. — Chandler  v.  Bacon, 
30  Fed.  Rep.  538,  540;  Krohn  v. 
Williamson,  62  Fed.  Rep.  869,  877, 
affirmed,  sw&  nom.  Williamson  v. 
Krohn,  66  Fed.  Rep.  655,  13  C.  C. 

A.  668,  31  U.  S.  App.  325. 
Massachusetts. — Hayward  v.  Lee- 

«on,  176  Mass.  310,  322,  57  N.  E.  656, 
49  L.  R.  A.  725. 

New  York. — Hutchinson  v.  Simp- 
son, 92  App.  Div.  382,  (dissenting 
opinion  of  Hatch,  J.,  at  p.  411),  87 
Supp.  369. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  86,  96  Pac.  528,  534, 
quoting  from  note  to  Pittsburg  Min- 
ing Co.  v.  Spooner,  17  Am.  St.  Rep. 
149. 

United  Kingdom  and  Colonies. — 
Carling's  Case,  L.  R.  1  Ch.  Div.  115, 
126 ;  Nant-Y-Glo  &  Blaina  Ironworks 
Co.  v.  Grave,  L.  R.  12  Ch.  Div.  738, 
747-748;  Eden  v.  Ridsdales  Railway 
Lamp  &  Lighting  Co.,  L.  R.  23  Q. 

B.  Div.  368;  Pearson's  Case,  L.  R. 


5  Ch.  Div.  336,  341,  affirming,  L.  R. 
4  Ch.  Div.  222 ;  Ex  parte  Theys,  L.  R. 
22  Ch.  Div.  122,  126;  De  Ruvigne's 
Case,  L.  R.  5  Ch.  Div.  306;  London 
Trust  Co.  v.  Mackenzie,  62  L.  J.  Ch. 
N.  S.  870,  877 ;  In  re  Fitzroy  Besse- 
mer Steel  Co.,  Ltd.,  50  L.  T.  N.  S. 
144. 

Reid  on  Corporate  Finance,  §  206. 

27.  Hayward  v.  Leeson,  176  Mass. 
310,  322-323,  57  N.  E.  656,  49  L.  R. 

A.  725,  and  cases  cited,  East  Ten- 
nessee   Land    Co.    v.    Leeson,    183 
Mass.  37,  66  N.  E.  427. 

28.  Eden    v.    Ridsdales    Railway 
Lamp  &  Lighting  Co.,  L.  R.  23  Q. 

B.  Div.    368,    372;    Nant-Y-Glo    & 
Blaina  Ironworks  Co.  v.  Grave,  L. 
R.  12  Ch.  Div.  738;  McKay's  Case, 
L.  R.  2  Ch.  Div.  1 ;  Hirsche  v.  Sims, 
1894  App.  Cas.  654,  667. 

Cf.  Shaw  v.  Holland,  1900,  2  Ch. 
Div.  305. 

29.  Cuba  Colony  Co.  v.  Kirby,  149 
Mich.  453,  459,  112  N.  W.  1133, 1135- 
1136. 


REMEDIES  OF  CORPORATION. 


313 


It  has  sometimes  been  attempted  to  hold  promoters,  guilty  of 
talcing  unlawful  profits  in  the  shares  of  the  company,  liable  for 
the  par  value  of  the  shares  so  taken.  This  would,  though  the 
shares  were  taken  without  consideration,  not  be  justifiable,  and 
the  attempt  has  generally  failed,30  unless  the  value  of  the  shares  is 
established  at  par  by  the  allotment  thereof  at  that  figure,  or  by 
some  other  circumstance.31  The  promoter  may,  in  case  of  the  in- 
solvency of  the  corporation,  be  held  liable  for  the  face  value  of 
shares  issued  to  him  without  consideration,32  but  that  is  another 


30.  St.  Louis  Ft.  S.  &  W.  R.  Co. 
v.  Tiernan,  37  Kan.  606,  635,  15  Pac. 
544,  560;  Arnold  v.  Searing,  78  N. 
J.    Eq.    146,   163,   78   Atl.   762,   769; 
Carling's  Case,  L.  R.  1  Ch.  Div.  115, 
126-127 ;  McKay's  Case,  L.  R.  2  Ch. 
Div.  1,  6,  8,  but  see  looker  v.  Na- 
tional Sugar  Refining  Co.,  80  N.  J. 
Eq.  305,  327,  et  seq.,  84  Atl.  10. 

In  Eland's  Case,  1893,  2  Ch.  Div. 
612,  the  question  of  the  value  at 
which  the  shares  should  be  charged 
to  the  promoter  does  not  seem  to 
have  been  raised.  It  is  possible  that 
the  shares  were  actually  worth  par, 
or  that  some  were  subscribed  for  at 
that  price. 

31.  Wills  v.  Nehalem  Coal  Co.,  52 
Or.  70,  78,  96  Pac.  528,  536;  First 
Avenue  Land  Co.  v.  Hildebrand,  103 
Wis.   530,   536-537,    79   N.    W.    753; 
Jenkins  v.  Bradley,  104  Wis.  540,  80 
N.  W.  1025. 

McKay's  Case,  L.  R.  2  Ch.  Div.  1, 
6,  8 ;  Phosphate  Sewage  Co.  v.  Hart- 
mont,  L.  R.  5  Ch.  Div.  394,  442,  447, 
46  L.  J.  Ch.  61;  Pearson's  Case,  L. 
R.  5  Ch.  Div.  336,  341,  affirming,  L. 
R.  4  Ch.  Div.  222;  In  re  London  & 
South  Western  Canal,  Ltd.,  1911,  1 
Ch.  Div.  346,  80  L.  J.  Ch.  N.  S.  234. 


It  has  been  said  that  as  a  matter 
of  administrative  assumption,  it  will 
be  taken  for  granted,  in  the  absence 
of  all  evidence,  that  the  value  of  the 
stock,  should  the  corporation  be  do- 
ing business,  is  par.  Chamberlayne 
on  The  Modern  Law  of  Evidence, 
§  2175e. 

The  value  of  the  shares  is  gen- 
erally taken  at  the  price  at  which 
the  allotment  is  made,  (see  cases 
cited  under  notes  26  and  27,  supra). 
but  the  company  has  sometimes 
been  allowed  the  highest  value  at 
any  time  while  the  shares  were  held 
by  the  promoter.  (See  cases  cited 
under  note  28,  supra). 

32.  Bigelow  v.  Old  Dominion  Cop- 
per, etc.,  Co.,  74  N.  J.  Eq.  457,  503, 
71  Atl.  153 ;  See  v.  Heppenheimer,  69 
N.  J.  Eq.  36,  73,  78,  61  Atl.  843; 
same  case  on  demurrer,  55  N.  J.  Eq. 
240,  36  Atl.  966,  affirmed,  sub  nom. 
Naumberg  v.  See,  56  N.  J.  Eq.  453, 
41  Atl.  1116;  Arnold  v.  Searing,  78 
N.  J.  Eq.  146,  163,  78  Atl.  762,  769; 
McAllister  v.  American  Hospital 
Ass'n,  62  Or.  530,  125  Pac.  286;  In 
re  Hess  Manufacturing  Co.,  23  Can. 
S.  C.  644,  659-660. 


314  THE  LAW  OF  PROMOTERS. 

matter.  The  promoter  is  in  such  case  held  liable  not  because  he 
took  the  shares  in  fraud  of  the  rights  of  the  corporation  or  its 
subscribers,  but  because  the  shares  were  issued  to  him  without 
consideration,  in  violation  of  the  statute,  and  in  fraud  of  the 
rights  of  the  creditors  of  the  corporation.  The  promoter's  lia- 
bility for  secret  profits  and  his  liability  as  the  holder  of  unpaid 
shares  are  quite  distinct.  The  promoter  might,  though  his  shares 
were  full  paid  because  actually  issued  for  property  equal  to  the 
face  value  thereof,  still  be  liable  to  account  therefor  to  the  cor- 
poration ;  33  for  the  fact  that  the  property  conveyed  by  the  pro- 
moter was  actually  worth  the  price  which  the  corporation  was 
made  to  pay  therefor,  does  not  affect  the  promoter's  liability  for 
secret  profits.34  A  situation  might  on  the  other  hand  arise  in 
which  the  promoter  would  be  liable  to  the  creditors  because  of  the 
issue  to  him  of  shares  for  less  than  the  face  value  thereof,  but 
could  not  be  made  to  account  for  secret  profits,  either  because 
his  profits  were  fully  disclosed,35  or  because  there  were  no  innocent 
subscribers,36  or  because  he  did  not,  in  fact,  make  any  profit. 

In  Arnold  v.  Searing,37  the  promoters  had  received  $400,000  in 
bonds  and  $3,000,000  in  stock,  under  such  circumstances  that  the 
court  held  the  securities  so  received  to  represent  an  unlawful 
profit.  The  court,  considering  the  value  at  which  the  shares 
were  to  be  charged  to  the  promoters,  said :  "  It  would  not  be  just 
or  reasonable  to  charge  any  of  the  defendants  with  the  par  value 
of  the  share  capital  taken  by  them,  for  the  reason  that  all  the 
syndicate  subscribers  who  became  shareholders  in  the  new  com- 

33.  Bigelow  v.  Old  Dominion  Cop-  example,    Spangler   Brewing   Co.   v. 
per,  etc.,  Co.,  74  N.  J.  Eq.  457,  503,  McHenry,  242  Pa.  522,  89  Atl.  665; 
71  Atl.  153;  Carling's  Case,   L.  R.  Re  Cornwall  Furniture  Co.,  20  Ont. 
1  Ch.  Div.  115.    And  see  post,  §  270,  L.  R.  520. 

see  also  ante,  §  100.  37.  78  N.  J.  Eq.  146,  163,  78  Atl. 

34.  See  ante,  §  100.  762,  769.     Cf.  Richard  Hanlon  Mil- 

35.  See  ante,  §§  109-116.  linery    Co.     v.     Mississippi     Valley 

36.  See  ante,  §§  120-130.  See  for      Trust  Co.,  251  Mo.  553,  158  S.  W, 

359. 


REMEDIES  OF  CORPORATION.  315 

pany  considered  the  stock  to  have  no  actual  value,  and  that  it  was 
purely  and  simply  a  bonus  in  which  all  the  stockholders  partici- 
pated. The  shareholders  who  are  complainants  in  this  suit,  re- 
ceived their  shares  upon  this  basis.  As  syndicate  subscribers, 
they  were  entitled  to  bonds  at  ninety-five  per  cent.  This  amount 
they  put  in  in  cash,  and  the  stock  was  a  mere  gratuity.  All  the 
stock  stands  on  this  footing.  The  complainants  and  the  company 
are  thus  estopped  from  asserting  the  invalidity  of  the  stock,  and 
inasmuch  as  there  do  not  appear  to  be  any  creditors,  the  receivers 
are  estopped  also.38  I,  therefore,  think  that  there  should  be  no 
accounting  for  any  of  the  stock  profits  which  were  made  by  the 
promoters." 

The  actual  decision  of  this  case  was  no  doubt  correct  upon  the 
particular  facts,  as  the  shares  in  question  apparently  never  had 
any  value,  and  the  company  was,  at  the  time  of  the  trial,  insolvent 
and  in  the  hands  of  a  receiver.  If,  however,  the  court  meant  to 
lay  down  a  rule  that  a  promoter  cannot  be  called  to  account  for 
a  secret  profit  taken  in  the  shares  of  the  corporation  if  the  re- 
mainder of  the  share  capital  was  issued  as  a  bonus  to  the  subscrib- 
ers for  the  bonds,  such  a  rule  is  wrong  in  principle  and  cannot  be 
approved.39  The  fact  that  the  shares  were  used  to  make  the  bonds 
salable,  does  not  prove  that  the  shares  were  considered  valueless, 
and  the  fact,  if  it  were  a  fact,  that  the  shares  were  wholly  value- 
less, would  not  justify  their  taking  by  the  promoter.40 

§166.  Remedies  when  promoter's  profit  is  taken  in  bonds,  or 

other  obligations  of  the  corporation. 
If  the  unlawful  profit  of  the  promoter  is  taken  in  the  bonds, 

38.  Citing  2  Clark  &  Marshall  on  39.  See  ante,  §  133,  and  see  Krohn 

Corporations,     §     398 ;     Knoop     v.  v.  Williamson,  62  Fed.  Rep.  869,  877 

Bohmrich,  49  N.  J.  Eq.  82,  23  Atl.  affirmed,    s«6    nom.    Williamson    v. 

118,  affirmed,  sub  nom.  Bohmrich  v.  Krohn,  66  Fed.  Rep.  655,  13  C.  C.  A. 

Knoop,  50  N.  J.  Eq.  485,  27  Atl.  636;  668,   31    U.    S.   App.  325.      See  also 

Breslin  v.  Fries-Breslin  Co.,  70  N.  J.  post,  §  245. 

Law  274,  58  Atl.  313.  4O.  See  ante,  §  133. 


316 


THE  LAW  OF  PROMOTERS. 


notes,  mortgages,  or  other  obligations  of  the  corporation,  a  court 
of  equity  will  at  the  suit  of  the  corporation  cancel  the  same,  un- 
less the  obligations  sought  to  be  cancelled  are  securities  of  a 
negotiable  character  and  in  the  hands  of  bona  fide  holders.41  If 
obligations  of  the  corporation  wrongfully  taken  by  the  promoter 
have  come  into  the  hands  of  bona  fide  purchasers  for  value,  a 
court  of  equity  may,  even  though  the  obligations  are  non-ne- 
gotiable in  character,  refuse  a  cancellation  in  toto  if  the  guilty 
promoters  would,  as  stockholders  of  the  corporation,  be  the"  prin- 
cipal beneficiaries  of  the  cancellation.42  « 

The  corporation  may,  instead  of  bringing  suit  for  the  cancel- 
lation of  its  obligations,  remain  passive  and  resist  the  payment 
thereof  on  the  ground  of  fraud  or  lack  of  consideration.43 


41.  Ex-Mission    Land    &    Water 
Co.   v.   Flash,  97  Cal.  610,  32  Pac. 
600 ;     California-Calaveras     Mining 
Co.  v.  Walls,  —  Cal.  — ,  149  Pac.  595 ; 
Lomita  Land  &  Water  Co.  v.  Robin- 
son, 154  Cal.  36,  51,  97  Pac.  10,  18 
L.  R.  A.  N.  S.  1106,  1133-1134;  Col- 
ton  Improvement  Co.  v.  Richter,  26 
N.  Y.  Misc.  26,  55  Supp.  486;  See  v. 
Heppenheimer,  55  N.  J.  Eq.  240,  36 
Atl.  966,  affirmed,  sub  nom.  Naum- 
berg  v.  See,  56  N.  J.  Eq.  453,  41  Atl. 
1116. 

If  the  bonds  are  not  negotiable, 
a  bona  fide  purchaser  stands  in  no 
better  position  than  his  transferor. 
Midwood  Park  Co.  v.  Baker,  128  N. 
Y.  Supp.  954,  affirmed,  144  N.  Y. 
App.  Div.  939,  129  Supp.  1135,  af- 
firmed, 207  N.  Y.  675,  100  N.  E.  1130. 
But  see  following  note. 

42.  In  Hyde  Park  Terrace  Co.  v. 
Jackson  Bros.  Realty  Co.,  161  N.  Y. 
App.   Div.   699,   146    Supp.   1037,   a 
mortgage  had,   without  the  knowl- 
edge of  the  subscribers,  been  given 
to  the  promoters  to  enable  them  to 


reap  secret  profits.  The  corporation, 
upon  discovering  the  fraud,  brought 
suit  for  the  cancellation  of  the  mort- 
gage which  had,  in  the  meantime, 
come  into  the  hands  of  bona  fide 
purchasers  for  value.  The  stock  of 
the  corporation  was,  to  the  extent 
of  $67,000,  held  by  persons  who  were 
privey  to  the  fraud,  and  to  the  ex- 
tent of  not  more  than  $48,000  by 
defrauded  subscribers.  A  cancella- 
tion of  the  mortgage  would  have  in- 
ured largely  to  the  benefit  of  the  tort 
feasors.  The  court  said  that  such 
a  result  was  abhorrent  to  every 
conception  of  equity,  and  adjudged 
that  the  cancellation  of  the  mort- 
gage should  be  refused  if  the  holders 
thereof  would  pay  to  the  corporation 
for  distribution  to  the  innocent  sub- 
scribers an  amount  equal  to  the 
subscriptions  paid  by  such  sub- 
scribers. That  in  the  event  that 
such  sum  should  not  be  paid  to  the 
plaintiff  within  six  months,  the 
mortgage  would  be  cancelled. 
43.  Federal. — In  re  Wyoming  Val- 


REMEDIES  OF  CORPORATION. 


317 


The  burden  is  upon  a  person  holding  the  securities  by  assign- 
ment from  the  promoters,  to  prove  that  he  is  a  bona  fide  holder 
for  value.44 

In  Ex-Mission  Land  &  Water  Co.  v.  Flash,45  a  mortgage  held 
by  the  promoters  and  constituting  a  part  of  their  illegal  profits 
was  foreclosed,  the  mortgaged  property  bought  in  by  the  pro- 
motors  and  a  deficiency  judgment  entered  against  the  corporation 
before  it  discovered  the  facts.  The  court,  in  an  action  brought 
by  the  corporation,  set  aside  the  decree  of  foreclosure  and  the 
deficiency  judgment,  and  cancelled  the  notes  and  mortgage  upon 
which  the  decree  and  judgment  were  founded. 

In  See  v.  Heppenheimer,46  the  receiver  of  a  corporation  was 
allowed  to  maintain  an  action  against  the  bondholders  to  deter- 
mine which  of  the  bonds  that  had  been  issued  to  the  promoters 


ley  Ice  Co.,  153  Fed.  Rep.  787, 
affirmed,  sub  nom.  Wiegand  v.  Albert 
Lewis  Lumber  &  Mfg.  Co.,  158  Fed. 
Rep.  608,  85  C.  C.  A.  430. 

Arkansas. — Tegarden  Brothers  v. 
Big  Star  Zinc  Co.,  71  Ark.  277,  72 
S.  W.  989. 

New  York. — Campbell  v.  Cypress 
Hills  Cemetery,  41  N.  Y.  34;  Mid- 
wood  Park  Co.  v.  Baker,  128  N.  Y. 
Supp.  954,  affirmed,  144  N.  Y.  App. 
Div.  939,  129  Supp.  1135,  affirmed, 
207  N.  Y.  675,  100  N.  E.  1130. 

Oregon. — Johnson  v.  Sheridan 
Lumber  Co.,  51  Or.  35,  93  Pac.  470. 

Pennsylvania. — Rice's  Appeal,  79 
Pa.  168,  203-204. 

United  Kingdom  and  Colonies. — 
In  re  Imperial  Land  Co.  of  Mar- 
seilles, L.  R.  4  Ch.  Div.  566. 

44.  California-Calaveras  Mining 
Co.  v.  Walls,  —  Cal.  — ,  149  Pac.  .595 ; 
See  v.  Heppenheimer,  55  N.  J.  Eq. 
240,  243,  36  Atl.  966,  affirmed,  *«& 
nom.  Naumberg  v.  See,  56  N.  J.  Eq. 


453,  41  Atl.  1116;  Baker  v.  Guaran- 
tee Trust  &  Safe  Deposit  Co.,  31  Atl. 
174 ;  Colton  Improvement  Co.  v. 
Richter,  26  N.  Y.  Misc.  26,  32,  55 
Supp.  486,  citing  Jewett  v.  Palmer,  7 
Johns.  Ch.  (N.  Y.)  65,  11  Am.  Dec. 
401 ;  Jackson  v.  McChesney,  7  Cow. 
(N.  Y.)  360;  Weaver  v.  Barden,  49 
N.  Y.  286,  297-299;  Seymour  v.  Mc- 
Kinstry,  106  N.  Y.  230,  239-242,  12 
N.  E.  348,  14  N.  -E.  94 ;  Duffus  v. 
Howard  Furnace  Co.,  8  N.  Y.  App. 
Div.  567,  572,  57  St.  Rep.  320,  4 
Supp.  925 ;  McGuire  v.  Hartford  Fire 
Ins.  Co.,  7  N.  Y.  App.  Div.  575,  591, 
592,  40  Supp.  300. 

45.  97  Cal.  610,  32  Pac.  600. 

46.  55  N.  J.  Eq.  240,  36  Atl.  966, 
affirmed,  sub  nom.  Naumberg  v.  See, 
56  N.  J.  Eq.  453,  41  Atl.  1116.     See 
also  See  v.  Heppenheimer,  69  N.  J. 
Eq.   36,   61   Atl.   843,   and   compare 
Hyde  Park  Terrace  Co.  v.  Jackson 
Bros.  Realty  Co.,  discussed  in  note 
42,  supra. 


318  THE  LAW  OF  PROMOTERS. 

without  consideration  were  held  by  bona  fide  holders  for  value,  so 
that  it  might  be  ascertained  upon  how  many  bonds  the  company 
was  actually  liable. 

In  Dickerman  v.  Northern  Trust  Co.,47  the  Supreme  Court 
of  the  United  States,  considering  the  same  transaction,  held  that 
the  fact  that  some  of  the  bonds  were  owned  by  promoters  claimed 
to  be  liable  to  the  debtor  corporation  for  secret  profits  received, 
was  not  a  ground  for  refusing  a  decree  of  foreclosure  of  the  trust 
mortgage  by  which  the  bonds  were  secured,  a  large  part  of  the 
bonds  being  in  the  hands  of  bona  fide  holders.  The  couf  t  said  that 
there  might,  when  the  bonds  were  presented  for  redemption  from 
the  proceeds  of  sale,  be  an  inquiry  as  to  their  validity  in  the  hands 
of  the  then  holders. 

The  fact  that  a  promoter  has  been  guilty  of  taking  a  secret 
profit  upon  the  promotion,  does  not  prevent  him,  except  in  so  far 
as  subject  to  a  set-off,  from  enforcing  his  lawful  claims  against 
the  company.48 

§  167.  Remedy  of  rescission. 

The  one  remedy  against  promoters  guilty  of  selling  their  prop- 
erty to  the  corporation  without  a  sufficient  disclosure  of  the  facts, 
the  existence  of  which  has  never  been  questioned,  is  the  remedy  of 
rescission.  Whether  the  property  sold  to  the  corporation  was 
owned  by  the  promoters  before  the  fiduciary  relation  was  assumed, 
or  whether  it  was  acquired  by  them  after  they  had  entered  upon 
the  organization  of  the  company,  the  sale  thereof  to  the  corpo- 
ration without  a  proper  disclosure  of  the  facts  49  is  in  either  case 
a  fraud  and  subject  to  rescission  at  the  election  of  the  corpora- 
tion. The  cases  in  which  the  remedy  of  rescission  has  been  re- 
sorted to  are,  for  the  most  part,  cases  in  which  the  promoters  ac- 

47.  176  IT.  S.  181,  206,  20  Sup.  Ct.  Lomita  Land  &  Water  Co.  v.  Robin- 
311,  44  L.  Ed.  423.  son,  154  Gal.  36,  51-52,  97  Pac.  10, 

48.  Jordan  v.  Annex  Corporation,  18  L.  R.  A.  N.  S.  1106,  1133-1134. 
109  Va.  625,  631,  64  S.  E.  1050,  1052,  49.  As    to    the    disclosure    to    be 
17    Am.    &    Eng.    Ann.    Gas.    267;  made,  see  ante,  §§  112-116. 


REMEDIES  OF  CORPORATION. 


319 


quired  the  property  in  question  at  some  time  before  the  commence- 
ment of  the  fiduciary  relation.  That  the  sale  may,  in  such  case, 
be  rescinded  if  the  promoters'  interest  in  the  transaction  is  not 
disclosed,  is  established  by  an  unbroken  line 'of  authorities.50  It 
has  in  fact  sometimes  been  doubted  that  any  other  remedy  is  in 
such  case  open  to  the  corporation.51  If  it  appears  that  the  pro- 
moters acquired  the  property  sold  to  the  corporation  at  a  time 
when  they  were  already  subject  to  the  fiduciary  relation,  an  action 
for  an  accounting  for  secret  profits  is  generally  a  more  satis- 
factory remedy  and  a  rescission  is  rarely  resorted  to.  There 
seems,  however,  to  be  no  sound  reason  why  the  corporation  should 
not,  if  it  so  desires,  be  allowed  to  rescind  its  purchase.52 


50.  Federal. — D  ickerman  v. 
Northern  Trust  Co.,  176  U.  S.  181, 
204,  20  Sup.  Ct.  311,  44  L.  Ed.  423, 
citing  Morawetz  on  Private  Corpora- 
tions, §§  291,  294,  546. 

Alabama. — Moore  v.  Warrior  Coal 
&  Land  Co.,  178  Ala.  234,  59  So.  219, 
Am.  &  Eng.  Ann.  Cas.,  1915,  B.  173. 

Maryland. — U  r  n  e  r  v.  Sollen- 
berger,  89  Md.  316,  331,  43  Atl.  810. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  328-329,  74  N.  E.  653,  108 
Am.  St.  Rep.  479 ;  same  v.  same,  203 
Mass.  159,  201-202,  89  N.  E.  193,  40 
L.  R.  A.  N.  S.  314. 

Missouri. — Brooker  v.  William  H. 
Thompson  Trust  Co.,  254  Mo.  125, 
157-158,  162  S.  W.  187,  195. 

Oregon. — Stanley  v.  Luse,  36  Or. 
25,  58  Pac.  75. 

Wisconsin. — Hebgen  v.  Koeffler, 
97  Wis.  313,  72  N.  W.  745. 

United  Kingdom  and  Colonies. — 
Erlauger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 


269,  27  W.  R.  65,  affirming,  New 
Sombrero  Phosphate  Co.  v.  Erlanger, 
L.  R.  5  Ch.  Div.  73,  25  W.  R.  436; 
Bentinck  v.  Fenn,  L.  R.  12  App.  Cas. 
652,  658,  affirming,  In  re  Cape 
Breton  Co.,  L.  R.  29  Ch.  Div.  795, 
affirming,  L.  R.  26  Ch.  Div.  221 ;  In 
re  Ambrose  Lake  Tin  &  Copper  Min- 
ing Co.,  L.  R.  14  Ch.  Div.  390,  394 ; 
-Lady well  Mining  Co.  v.  Brookes,  L. 
R.  35  Ch.  Div.  400,  17  Am.  &  Eng. 
Corp.  Cas.  22,  affirming,  L.  R.  34  Ch. 
Div.  398;  In  re  Hess  Manufacturing 
Co.,  23  Can.  S.  C.  644. 

51.  See  post,  §  171. 

52.  California. — Lomita    Land    & 
Water  Co.  v.  Robinson,  154  Cal.  36, 
45,  97  Pac.   10,  18  L.  R.  A.  N.   S. 
1106,  1122. 

Maine. — Camden  Land  Co.  v. 
Lewis,  101  Me.  78,  95,  63  Atl.  523, 
530. 

M issouri.— St.  Louis  &  Utah  Silver 
Mining  Co.  v.  Jackson,  5  Central 
Law  Journal  317. 

Ohio. — Second  National  Bank  v. 
Greenville  Screw- Point  Steel  Fence 


320  THE  LAW  OF  PROMOTERS. 

It  must,  however,  to  sustain  the  action  of  rescission,  be  made  to 
appear  that  the  promoters  were  at  some  time  the  owners  of  the 
property  and  the  vendors  on  the  sale  to  the  corporation.  It  has 
been  held  that  if  the  promoters  acquired  their  secret  profit  by 
means  of  an  option,  and  never  owned  or  pretended  to  own  the 
property  which  was  conveyed  to  the  corporation  directly  by  the 
original  vendor,  no  action  for  the  rescission  of  the  company's 
purchase  will  lie  against  the  promoters.53 

§  168.  The  same  subject. — Rescission  of  entire  transaction. 

If  several  properties  are  sold  to  the  corporation  as  a  part  of 
the  same  transaction,  it  is  not  necessary,  in  order  to  render  the 
entire  transaction  voidable,  that  the  non-disclosure  of  the  pro- 
moters should  extend  to  all  the  parcels.  If  there  is  fraud  in  the 
sale  of  a  single  parcel,  the  whole  transaction,  being  incapable  of 
severance,  is  tainted  by  the  fraud  and  voidable  at  the  election 
of  the  corporation.54  If  a  number  of  parcels  are  sold  to  the  cor- 
poration in  a  single  transaction,  it  cannot  rescind  as  to  one  par- 
cel, without  rescinding  the  entire  transaction.55 

The  purchase  of  the  corporation  may  be  rescinded  if  any  single 
promoter  is  personally  interested  in  the  transaction.  The  fact 
that  there  are  other  promoters  not  interested  in  the  property  sold 
to  the  corporation,  or  that  some  of  the  vendors  of  the  property 
were  not  promoters  of  the  company,  is  immaterial.56 

Post  Co.,  23  Ohio  C.  C.  274,  281.  153,    168-170,    affirmed,    sub    nom. 

Oregon. — Johnson      v.      Sheridan  Gluckstein    v.    Barnes,    1900,    App. 

Lumber  Co.,  51  Or.  35,  93  Pac.  470.  Cas.  240. 

Virginia. — Jordan   v.    Annex   Cor-  53.  Maxwell   v.    McWilliams,    145 

poration,  109  Va.  625,  64  S.  E.  1050,  111.  App.  155,  167-168. 

17  Am.  &  Eng.  Ann.  Cas.  267.  54.  Stanley  v.  Luse,  36  Or.  25,  37, 

Wisconsin. — Limited      Investment  58  Pac.  75,  79. 

Association  v.  Glendale  Investment  55.  Omnium  Electric  Palaces  Lim. 

Association,  99  Wis.  54,   74   N.   W.  v.  Baines,  1914,  1  Ch.  Div.  332,  82  L. 

633.  J.  Ch.  N.  S.  519,  109  L.  T.  N.  S.  206. 

United,  Kingdom   and   Colonies. —  56.  In  re  Cape  Breton  Co.,  L.  R. 

In  re  Olympia,  Ltd.,  1898,  2  Ch.  Div.  29  Ch.  Div.  795,  affirming,  L.  R.  26 


REMEDIES  OF  CORPORATION.  321 

§  169.  The  same  subject. — Methods  of  effecting  rescission. 

If  the  fraud  is  not  discovered  until  after  the  transaction  has 
been  consummated  the  corporation  may  either  bring  an  action  in 
equity  for  a  rescission,  offering  in  its  complaint  to  reconvey  the 
property  sold  to  it,  or  else  give  notice  of  rescission,  tender  a  re- 
conveyance, and  bring  a  suit  at  law  for  the  recovery  of  the  pur- 
chase price.57 

If  the  fraud  of  the  promoters  is  discovered  before  the  trans- 
action has  been  consummated,  the  remedy  of  the  corporation  is 
to  refuse  to  take  title,  and  to  bring  suit  against  the  vendors  for 
such  part  of  the  consideration  as  has  already  been  paid.58 

§  170.  The  same  subject. — Restoration  of  status  quo. 

A  corporation  wishing  to  rescind  its  purchase  because  of  a  fraud 
committed  by  its  promoters,  must  restore,  or  offer  to  restore,  to 
the  vendors  the  property  received  upon  the  purchase.59  The  fact 
that  this  is  difficult,  or  even  impossible,  does  not  affect  the  question 

Ch.  Div.  221,  affirmed,  sul  nom.  Ben-          Getty  v.  Devlin,  54  N.  Y.  403,  414- 

tinck  v.   Fenn,  L.   R.  12  App.  Gas.  415 ;  Barr  v.  N.  Y.  L.  E.  &  W.  R.  R. 

652.  Co.,  125  N.  Y.  263,  272,  26  N.  E.  145, 

57.  See  post,  §§  194,  241.  34  St.  Rep.  743. 

58.  Cortes    Co.    v.    Thannhauser,          Ladywell  Mining  Co.  v.   Brookes, 
45  Fed.  Rep.  730-  Munson  v.  Syra-  L.   R.  35   Ch.   Div.  400,   17  Am.   & 
cuse,    Geneva    &   Corning    Railroad  Eng.  Corp.  Cas.  22,  affirming,  L.  R. 
Co.,  103  N.   Y.  58,  8  N.   E.  355,  29  34  Ch.  Div.  398,  409,  411,  412;  The 
Am.  &  Eng.  R.  R.  Cas.  377;  Jordan  Great  Luxembourg  Ry.  Co.  v.  Mag- 
v.  Annex  Corporation,  109  Va.  625,  nay,  25  Beav.  586;  Erlanger  v.  New 
64  S.  E.  1050,  17  Am.  &  Eng.  Ann.  Sombrero   Phosphate   Co.,    L.    R.    3 
Cas.  267.  App.   Cas.   1218,   1278,  6   Eng.   Rul. 

A  minority  stockholder  may  sue  Cas.  777,  39  L.  T.  N.  S.  269,  27  W. 

to  prevent  the  consummation  of  the  R.  65;  In  re  Cape  Breton  Co.,  L.  R. 

transaction.       Insurance     Press     v.  26  Ch.  Div.  221,  228,  affirmed,  L.  R. 

Montauk  Wire  Co.,  103  N.  Y.  App.  29  Ch.  Div.  795,  affirmed,  sub  nom. 

Div.  472,  475,  93  Supp.  134.  Bentinck  v.  Fenn,  L.  R.  12  App.  Cas. 

59.  Federal  Life  Ins.  Co.  v.  Grlf-  652 ;  In  re  Leeds  &  Hanley  Theatres 
fin,  173  111.  App.  5,  17.  of  Varieties,  1902,  2  Ch.  Div.  809, 


322 


THE  LAW  OF  PROMOTERS. 


unless  the  restoration  of  the  status  quo  is  prevented  by  the  act  of 
the  wrong-doer  himself.60 

In  Phosphate  Sewage  Co.  v.  Hartmont,61  the  property  sold  to 


826 ;  Lagunas  Nitrate  Co.  v.  Lagunas 
Syndicate,  1899,  2  Ch.  Div.  392,  433, 
463,  (but  see  dissenting  opinion  of 
Rigby,  L.  J.  456,  et  seq.)  ;  In  re 
Hess  Manufacturing  Co.,  23  Can.  S. 
C.  644,  663-664. 

In  Federal  Life  Ins.  Co.  v.  Grif- 
fin, 173  111.  App.  5,  21,  where  the 
promoter  sued  in  equity  for  moneys 
due  him  under  a  contract  with  the 
corporation  which  the  latter  had 
failed  to  rescind,  the  court  limited 
his  recovery  to  the  reasonable  value 
of  the  rights  which  he  had  trans- 
ferred to  the  corporation. 

Where  it  is  sought  to  hold  parties 
other  than  the  vendors  jointly 
liable  with  them,  (see  post,  §  304), 
the  offer  of  a  conveyance  should  be 
made  to  all  parties  whom  the  cor- 
poration seeks  to  hold  liable.  See 
Lindsay  Petroleum  Co.  v.  Hurd,  L. 
R.  5  P.  C.  221,  231. 

As  to  accounting  for  interim 
profits  derived  by  the  corporation 
from  the  operation  of  the  property, 
see  American  Shipbuilding  Co.  v. 
Commonwealth  S.  S.  Co.,  215  Fed. 
Rep.  296,  131  C.  C.  A.  596;  Lindsay 
Petroleum  Co.  v.  Hurd,  L.  R.  5  P. 
C.  221,  240;  Lagunas  Nitrate  Co.  v. 
Lagunas  Syndicate,  1899,  2  Ch.  Div. 
392,  460,  et  seq.,  (dissenting  opinion 
of  Rigby,  L.  J.) 

As  to  making  an  allowance  for 
use  and  occupation,  see  Finck  v. 
Canadaway  Fertilizer  Co.,  152  N.  Y. 
App.  Div.  391,  395-396,  136  Supp. 


914,  modified  and  affirmed,  208  N. 
Y.  607,  102  N.  E.  1102. 

Where  the  subject  matter  of  the 
purchase  was  ships  to  be  manufac- 
tured for  the  corporation,  a  re- 
delivery  of  the  completed  ships  was 
held  to  sufficiently  place  the  de- 
fendant in  statu  quo.  Common- 
wealth S.  S.  Co.  v.  American  Ship- 
building Co.,  197  Fed.  Rep.  780,  787, 
same  v.  same,  197  Fed.  Rep.  797,  814, 
affirmed,  215  Fed.  Rep.  296,  131  C. 
C.  A.  596.  See  also  post,  §  240. 

For  cases  dealing  with  the  ques- 
tion of  restoration  of  the  former 
status  as  a  condition  of  rescission, 
see  24  Am.  &  Eng.  Enyc.  (2nd  Ed.), 
620,  et  seq.  See  also  editorial,  N.  Y. 
Law  Journal,  June  15,  1912. 

60.  Getty  v.  Devlin,  54  N.  Y.  403, 
415;      Ladywell      Mining     Co.      v. 
Brookes,  L.  R.  34  Ch.  Div.  398,  411, 
affirmed,  L.  R.  35  Ch.  Div.  400,  17 
Am.  &  Eng.  Corp.  Gas.  22.     See  The 
Great  Luxembourg  Ry.  Co.  v.  Mag- 
nay,    25    Beav.    586,    596-597.      See 
post,  §  240. 

A  trifling  change  in  the  condition 
of  the  property  may  no  doubt  be 
disregarded.  Alger  v.  Anderson,  78 
Fed.  Rep.  729.  And  see  Finck  v. 
Canadaway  Fertilizer  Co.,  152  N.  Y. 
App.  Div.  391,  136  Supp.  914,  modi- 
fied and  affirmed,  208  N.  Y.  607,  102 
N.  E.  1102. 

61.  L.  R,  5  Ch.  Div.  394,  446,  454, 
455,  46  L.  J.  Ch.  661. 


REMEDIES  OF  CORPORATION.  323 

the  corporation  consisted  of  a  concession  which  had  before  its 
conveyance  to  the  corporation  become  subject  to  forfeiture, 
this  fact  being  concealed  from  the  vendee.  The  concession  was 
afterwards,  by  reason  of  the  facts  existing  at  the  time  of  the  pur- 
chase, declared  forfeited.  It  was  held  that  the  corporation  could 
maintain  a  suit  for  the  recovery  of  the  purchase  price  though 
restoration  had  become  impossible. 

In  Ashmead  v.  Colby,62  the  corporation  duly  tendered  a  recon- 
veyance. The  defendants  failed  to  accept  the  reconveyance,  and 
the  property  was  afterward  sold  on  an  execution  issued  against  the 
corporation.  A  reconveyance  had  thus  become  impossible.  The 
corporation  was,  however,  permitted  to  recover  the  purchase  price 
paid  by  it,  deducting  the  fair  value  of  the  land. 

In  Ladywell  Mining  Co.  v.  Brookes,63  the  corporation  had  pur- 
chased a  leasehold  interest  in  a  lead  mine.  The  corporation, 
without  notifying  the  vendors  of  its  intention  to  proceed  against 
them  for  a  rescission,  allowed  the  landlord  to  take  judgment  by 
default  in  an  action  to  recover  possession  of  the  property.  It 
was  held  that  a  reconveyance  having  become  impossible,  the  corpo- 
ration could  not  sue  the  vendors  for  the  recovery  of  the  purchase 
price. 

In  Jordan  v.  Annex  Corporation,64  the  court  refused  to  permit 
the  rescission  of  the  purchase  of  a  lease  after  two-thirds  of  the 
demised  term  had  expired. 

§  171.  Action  for  fraud  and  deceit. 

A  question  which  should  be,  but  is  not,  entirely  free  from  doubt, 
is  that  of  the  right  of  a  corporation  to  sue  its  promoters  in  an 
action  at  law  for  the  damages  suffered  by  reason  of  the  fraudulent 
sale  to  it  of  the  promoters'  own  property;  that  is,  the  right  of 

62.  26  Conn.  287.  In  re  Hess   Manufacturing  Co.,  23 

63.  L.   R.   34  Ch.   Div.  398,  410-      Can.   S.  C.  644,  663-664. 

411,  affirmed,  L.  R.  35  Ch.  Div.  400,  64.  109  Va.  625,  64  S.  E.  1050,  17 
17  Am.  &  Eng.  Corp.  Gas.  22,  cited  Am.  &  Eng.  Ann.  Gas.  267. 


324  THE  LAW  OF  PROMOTERS. 

the  corporation  to  hold  the  promoters  liable,  not  for  the  profits 
made  by  them,  but  for  the  damage  caused  to  it  by  the  fraud — not 
for  the  difference  between  the  cost  of  the  property  to  the  pro- 
moters and  the  price  at  which  it  was  sold  to  the  corporation,  but 
for  the  difference  between  the  cost  of  the  property  to  the  corpo- 
ration and  its  actual  market  value  at  the  time  of  the  sale.  This 
question  is,  if  the  circumstances  are  such  that  the  promoters  may 
be  compelled  to  account  for  their  profits  in  the  transaction,  of  no 
great  moment,  as  the  action  for  an  accounting  is  generally  more 
satisfactory  and  easier  of  proof,  though  it  might  sometimes  hap- 
pen that  the  recovery  in  an  action  for  damages  would  exceed  the 
recovery  upon  an  accounting  for  promoters'  profits.65  The  right 
to  maintain  an  action  for  damages  is  of  importance,  if  the  prop- 
erty sold  to  the  corporation  was  owned  by  the  promoters  before 
they  entered  upon  the  fiduciary  relation.  An  action  for  an  ac- 
counting for  secret  profits  does  not  in  such  case  lie,66  and  the  re- 
scission of  the  purchase  is  after  the  lapse  of  even  a  short  period  of 
time  generally  inadvisable  and  often  impossible. 

Some  of  the  earlier  English  cases  seem  to  hold  that  if  the  pro- 
moters acquired  the  property  sold  to  the  corporation  before  they 
became  subject  to  the  fiduciary  relation,  the  only  remedy  open  to 
the  corporation  is  the  rescission  of  its  purchase,  it  being  said  that 
to  allow  the  company  to  take  the  property,  not  at  the  price  fixed 
by  its  vendor,  but  at  its  fair  market  value,  amounts  to  making  a 
new  bargain  for  the  parties.67  The  reasoning  of  these  cases  is 

65.  In  re  Leeds  &  Hanley  Thea-  Brookes,  L.  R.  35  Ch.  Div.  400,  408, 
tres  of  Varieties,  1902,  2  Ch.  Div.  17   Am.   &  Eng.   Corp.   Gas.   22,  af- 
809,  814.  firming,  L.  R.  34  Ch.  Div.  398,  and 

66.  See  ante,  §  161.    An  account-  see  dictum  in  Re  Hess  Manufactur- 
ing for  profits  may  under  some  cir-  ing  Co.,  23  Can.  S.  C.  644,  665.    Cf. 
cumstances    be    had.      See    ante,    §  Dupont  v.  Tilden,  42  Fed.  Rep.  87. 
102.  The    Ladywell    Mining    Company 

67.  In   re   Ambrose   Lake   Tin   &  cases  rely  upon  In  re  Cape  Breton 
Copper  Mining  Co.,  L.  R.  14  Ch.  Div.  Company,    L.    R.    20    Ch.    Div.    795, 
390,    398 ;    Ladywell   Mining   Co.    v.  affirming,  L.  R.  26  Ch.  Div.  221,  229, 


REMEDIES  OF  CORPORATION. 


325 


not  at  all  satisfactory.  The  same  argument  could  with  equal 
force,  be  applied  to  any  case  in  which  a  vendee,  having  been  in- 
duced by  the  fraud  of  his  vendor  to  purchase  property,  sues  the 
vendor  for  damages  for  fraud  and  deceit  and  by  a  recovery  in 
such  action  in  effect  reduces  the  price  paid  for  the  property.68 

It  has  sometimes  been  stated  that  the  corporation  can  maintain 
an  action  for  fraud  and  deceit  if  a  rescission  has  become  impossible 
or  impracticable,  the  implication  being  that  the  action  for  dam- 
ages would  otherwise  not  lie.69 

The  rule  sustained  by  the  weight  of  authority  is  that  a  sale  of 
the  promoter's  property  to  the  corporation,  without  a  proper 
disclosure  of  his  personal  interest  in  the  transaction,  constitutes 
a  violation  of  the  duties  which  flow  from  the  fiduciary  relation, 
and  that  the  corporation  may  sue  the  promoter  for  the  damages 
suffered  by  reason  of  his  deceit,  the  measure  of  such  damages  being 


234.  In  that  case  Cotton,  L.  J., 
said  (p.  805),  that  the  company 
could  not  collect  damages,  as  the 
property  had  no  definite  market 
value.  Fry,  L.  J.,  concurred  on  the 
ground  that  the  transaction  com- 
plained of  had  been  ratified  by  the 
company,  while  Bowen,  L.  J.,  dis- 
sented on  the  ground  that  a  proper 
case  for  damages  had  been  made 
out.  The  House  of  Lords  when  af- 
firming the  case,  (sub  nom.  Ben- 
tinck  v.  Fenn,  L.  R.  12  App.  Gas. 
652),  disapproved  of  the  opinions 
below,  and  affirmed  on  the  ground 
that  there  was  no  evidence  of  non- 
disclosure, and  no  proof  that  the 
purchase  price  exceeded  the  mar- 
ket value,  clearly  intimating  that 
an  action  for  damages  for  fraud 
and  deceit  would  lie  in  a  proper 
case.  See  In  re  Olympia,  Ltd.,  1898, 
2  Ch.  Div.  153,  178-179,  (affirmed, 


sub  nom.  Gluckstein  v.  Barnes,  1900 
App.  Cas.  240). 

Care  must  be  taken  not  to  be  mis- 
led by  the  statement  sometimes 
made  that  a  rescission  is,  if  the 
promoters  owned  the  property  be- 
fore they  entered  upon  the  fiduciary 
relation,  the  sole  remedy  in  equity, 
the  action  for  damages  for  fraud 
and  deceit  being  generally  an  action 
at  law.  See  Tyrrell  v.  Bank  of  Lon- 
don, 10  H.  L.  Cas.  26,  52-53,  11  Eng. 
Rep.  934,  but  see  post,  §  193. 

68.  See  In  re  Olympia,  Ltd..  1898, 
2   Ch.   Div.   153,   179,   affirmed,   sub 
nom.    Gluckstein    v.    Barnes,    1900 
App.  Cas.  240. 

69.  In  re   Ambrose   Lake  Tin   & 
Copper  Mining  Company,  L.  R.  14 
Ch.  Div.  390,  394,  and  see  Omnium 
Electric  Palaces  Lira.  v.  Baines,  1914, 
1   Ch.    Div.   332,   343-344,    82   L.    J. 
Ch.  N.  S.  519,  524,  109  L.  T.  N.  S. 


326 


THE  LAW  OF  PROMOTERS. 


the  difference  between  the  price  the  corporation  paid  for  the  prop- 
erty, and  the  actual  value  thereof.70 

§  172.  Election  of  remedies. 

As  shown  in  the  preceding  sections  of  this  chapter,  the  corpora- 
tion may,  in  case  of  the  unlawful  sale  to  it  of  the  promoters'  own 
property,  rescind  its  purchase  and  recover  the  purchase  price  paid 
by  it,  or  sue  the  promoters  for  the  difference  between  the  price 
paid  for  the  property  and  the  actual  value  thereof,  or  in  a  proper 
case  compel  the  promoters  to  account  for  the  profits  gained  by 
them  in  the  transaction.  These  remedies  being  open  to  the  cor- 
poration, it  may  in  its  discretion  elect  which  of  them  to  pursue.71 


206.  See  also  Hayward  v.  Leeson, 
176  Mass.  310,  321,  57  N.  E.  656, 
49  L.  R.  A.  725,  and  Old  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  329,  74  N.  E.  653,  108 
Am.  St.  Rep.  479. 

70.  Federal. — Central  Trust  Co.  v. 
East  Tennessee  Land  Co.,  116  Fed. 
Rep.  743,  748;  Dickerman  v.  North- 
ern Trust  Co.,  176  U.  S.  181,  204,  20 
Sup.  Ct.  311,  319,  44  L.  Ed.  423. 

Alabama. — M  o  o  r  e  v.  Warrior 
Coal  &  Land  Co.,  178  Ala.  234,  59 
So.  219,  Am.  &  Eng.  Ann.  Cas.,  1915, 
B.  173. 

California. — L  o  m  i  t  a  Land  & 
Water  Co.  v.  Robinson,  154  Cal. 
36,  45,  97  Pac.  10,  18  L.  R.  A.  N.  S. 
1106,  1122;  Ex-Mission  Land  & 
Water  Co.  v.  Flash,  97  Cal.  610,  626, 
32  Pac.  600,  604,  citing  Morawetz 
on  Corporations,  §  546. 

Kansas. — Hayden  v.  Green,  66 
Kan.  204,  71  Pac.  236. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  203 
Mass.  159,  202,  89  N.  E.  193,  40  L. 
R.  A.  N.  S.  314;  same  v.  same,  188 


Mass.  315,  328-329,  74  N.  E.  653, 
108  Am.  St.  Rep.  479. 

Missouri. — Brooker  v.  William  H. 
Thompson  Trust  Co.,  254  Mo.  125, 
158,  162  S.  W.  187,  195. 

United  Kingdom  and  Colonies. — 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
1278,  6  Eng.  Rul.  Cas.  777,  39  L. 
T.  N.  S.  269,  27  W.  R.  65;  In  re 
Leeds  &  Hanley  Theatres  of  Varie- 
ties, 1902,  2  Ch.  Div.  809,  825-827; 
Bentinck  v.  Fenn,  L.  R.  12  App.  Cas. 
652. 

And  see  'the  statement  in  Pitts- 
burg  Mining  Co.  v.  Spooner,  74  Wis. 
307,  320,  42  N.  W.  259,  262,  17  Am. 
St.  Rep.  149,  24  Am.  &  Eng.  Corp. 
Cas.  1,  where  the  court  perhaps 
loses  sight  of  the  distinction  be- 
tween the  case  where  the  promoter 
sells  his  own  property  te  the  com- 
pany, and  the  case  where  he  may  be 
deemed  to  have  made  the  original 
purchase  as  trustee  for  the  com- 
pany. 

71.  Federal. — Dickerman  v. 
Northern  Trust  Co.,  176  U.  S.  181, 


REMEDIES  OF  CORPORATION. 


327 


The  election  of  the  corporation  once  made  is  binding  upon  it. 
Having  disaffirmed  the  contract  it  cannot  afterwards  resort  to  a 
remedy  based  upon  an  affirmance,  and  if  it  has  with  knowledge  of 
the  facts  affirmed  its  purchase,  it  cannot  afterwards  proceed  upon 
a  disaffirmance.72 

§  173.  The  same  subject. — No  right  of  election  in  promoter. 

Promoters  guilty  of  making  an  unlawful  sale  of  their  own  prop- 
erty to  the  corporation  have  not,  upon  discovery  of  the  facts,  an 
election  to  pay  the  damages  of  the  corporation  or  make  good  their 
representations,  and  thereby  avoid  a  rescission  of  their  sale.73 

In  Ex-Mission  Land  &  Water  Co.  v.  Flash,74  the  court  at  the 
suit  of  the  corporation  cancelled  a  mortgage  taken  by  the  pro- 
moters as  part  of  their  unlawful  profits.  .  The  promoters  claimed 
that  the  proper  relief  to  be  granted  the  corporation  was  the  re- 
scission of  the  entire  transaction.  The  court  said  that  the  remedy 


204,  20  Sup.  Ct.  311,  44  L.  Ed.  423, 
citing  Morawetz  on  Private  Cor- 
porations, §§  291,  294,  546. 

California. — L  o  m  i  t  a  Land  & 
Water  Co.  v.  Robinson,  154  Cal. 
36,  45,  97  Pac.  10,  18  L.  R.  A.  N.  S. 
1106,  1122;  Burbank  v.  Dennis,  101 
Cal.  90,  102,  35  Pac.  444,  448;  Ex- 
Mission  Land  &  Water  Co.  v.  Flash, 
97  Cal.  610,  626,  32  Pac.  600,  604, 
citing  Morawetz  on  Corporations, 
§  546. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  328-329,  74  N.  E.  653, 
108  Am.  St.  Rep.  479. 

Ohio. — Second  National  Bank  v. 
Greenville  Screw-Point  Steel  Fence 
Post  Co.,  23  Ohio  C.  C.  274,  281. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  86,  96  Pac.  528,  534, 
quoting  from  note  to  Pittsburg 


Mining  Co.  v.  Spooner,  17  Am  St. 
Rep.  149. 

Virginia. — Jordan  v.  Annex  Cor- 
poration, 109  Va.  625,  64  S.  E.  1050, 
17  Am.  &  Eng.  Ann.  Cas.  267. 

Wisconsin. — Hebgen  v.  Koeffler, 
97  Wis.  313,  320,  72  N.  W.  745,  747, 
following  Franey  v.  Warner,  96 
Wis.  222,  71  N.  W.  81,  85 ;  Pittsburg 
Mining  Co.  v.  Spooner,  74  Wis.  307, 
42  N.  W.  259,  17  Am.  St.  Rep.  149, 
24  Am.  &  Eng.  Corp.  Cas.  1. 

72.  Limited   Investment   Ass'n  v. 
Glendale  Investment  Ass'n,  99  Wis. 
54,  58,  74  N.  W.  633,  634.     And  see 
post,  §§  252,  257. 

73.  Lagunas    Nitrate   Co.    v.    La- 
gunas   Syndicate,   1899,   2   Ch.   Div. 
392,  417.    Cf.  Pulsford  v.  Richards, 
17  Beav.  87,  95. 

74.  97  Cal.  610,  636,  32  Pac.  600, 
607. 


328  THE  LAW  OF  PROMOTERS. 

of  rescission  was  not  exclusive,  that  the  promoters  may  not  have 
been  financially  able  to  repay  the  entire  purchase  price,  and  that 
they  would  have  been  in  a  more  favorable  position  to  maintain 
their  contention  had  they  made  a  tender  of  the  necessary  sum,  in- 
timating, somewhat  vaguely  it  is  true,  that  the  promoters  might, 
by  offering  a  return  of  the  purchase  moneys,  have  confined  the 
company  to  a  rescission  of  the  purchase. 

It  would  seem  on  principle  that  the  election  of  remedies  should 
rest  entirely  with  the  corporation,  and  that  the  promoters  should 
be  made  to  respond  to  whatever  appropriate  relief  may  be  asked 
by  it. 

§  174.  Remedies  of  the  corporation  where  promoter  receives 

secret  commission  or  other  benefit. 

If  the  promoter's  profit  is  made,  not  by  selling  his  own  prop- 
erty to  the  corporation,  nor  by  purchasing  property  for  himself 
individually  and  re-selling  it  to  the  corporation,  at  an  advance, 
but  by  means  of  a  secret  commission  received  from  persons  selling 
property  to  the  corporation,  the  corporation  may  upon  discover- 
ing the  facts  compel  the  promoter  to  account  to  it  for  the  amount 
of  the  commission  so  received  by  him.75 

75.  Federal. — Chandler  v.  Bacon,  371;    Emma    Silver    Mining    Co.    v. 

30  Fed.  Rep.  538.  Lewis,  L.  R.  4  C.   P.  D.  396,  408- 

Connecticut. — Yale  Gas  Stove  Co.  409 ;    Lydney   &   Wigpool   Iron   Ore 

v.    Wilcox,    64    Conn.    101,    121-122,  Co.   v.   Bird,   L.   R.  33  Ch.   Div.  85, 

125-128,  29  Atl.  303,  25  L.  R.  A.  90,  94 ;  Whaley  Bridge  Calico  Printing 

42  Am.  St.  Rep.  159,  47  Am.  &  Eng.  Co.  v.  Green,  L.  R.  5  Q.  B.  D.  109, 

Corp.  Gas.  647.  112,     28     W.     R.     351;     Phosphate 

Iowa. — The    Telegraph    v.    Loet-  Sewage  Co.   v.   Hartmont,   L.   R.   5 

scher,  127  Iowa  383,  101  N.  W.  773,  Ch.  Div.  394,  441^42,  457,  46  L.  J. 

4  A.  &  E.  Ann.  Gas.  667.  Ch.  661 ;  In  re  Hess  Manufacturing 

Massachusetts. — Emery     v.     Par-  Co.,  23  Can.  S.  C.  644,  659. 

rott,  107  Mass.  95,  100,  104;   Hay-  The   dictum    in    Second    National 

ward    v.    Leesori,    176    Mass.    310,  Bank     v.     Greenville     Screw-Point 

322,  57  N.  E.  656,  49  L.  R.  A.  725.  Steel  Fence  Post  Co.,  23  Ohio  C.  C. 

United  Kingdom  and   Colonies. —  274,  280,    probably  intends    nothing 

Bagnall  v.  Carlton,  L.  R.  6  Ch.  Div.  to  the  contrary. 


REMEDIES  OF  CORPORATION. 


329 


The  same  remedy  is  open  to  the  corporation  if  the  promoter 
receives,  as  a  gift  from  a  vendor  to  the  corporation,  the  shares  nec- 
essary to  qualify  the  promoter  as  a  director,  or  if  the  promoter  by 
any  other  means  unlawfully  procures  for  his  own  benefit  without 
consideration  any  money,  securities,  or  other  benefits.76 

The  promoter  may,  if  his  profit  is  received  in  shares,  be  com- 
pelled to  surrender  such  shares  to  the  company  or  to  pay  the 
value  thereof,  or  to  account  for  the  proceeds  of  such  shares  as  he 
has  sold.77 

If  the  profit  is  received  by  the  promoter  in  the  bonds  or  notes 
of  the  company,  the  corporation  may,  unless  the  securities  have 
come  into  the  hands  of  a  bona  fide  holder,  repudiate  liability 
thereon,  and  either  defend  a  suit  brought  to  enforce  the  same,  or 
maintain  an  action  in  equity  for  the  cancellation  thereof.78 

If  the  promoters  obtain  from  a  person  selling  property  to  the 
corporation  a  secret  agreement  to  pay  them  a  commission  or 
other  compensation  for  services,  the  corporation  may,  if  the  fact 
is  discovered  before  the  agreed  compensation  is  paid,  compel  its 
vendor  to  pay  the  amount  of  the  agreed  commission  directly  to 
it.79  If  payment  has  before  that  time  been  made,  the  vendor  may 
still  be  held  liable  to  the  corporation  as  a  kind  of  surety  for  the 
promoters  and,  if  the  corporation  is  unable  to  obtain  satisfaction 
from  the  promoters,  be  made  to  pay  the  agreed  compensation  a 
second  time.80  These  questions,  as  well  as  that  relating  to  the  right 


76.  Hayward  v.  Leeson,  176  Mass. 
310,  57  N.  E.  656,  49  L.  R.  A.  725; 
Colton  Improvement  Co.  v.  Richter, 
26  N.  Y.  Misc.  26,  32,  55  Supp.  486; 
Wills  v.  Nehalem  Coal  Co.,  52  Or. 
70,  81,  86,  96  Pac.  528,  532,  534; 
London  Trust  Co.  v.  Mackenzie,  62 
L.  J.  Ch.  N.  S.  870,  877,  and  see 
ante,  §  94. 

Cf.  dictum  in  Tyrrell  v.  Bank  of 
London,  10  H.  L.  Gas.  26,  59,  11 
Eng.  Rep.  934. 


77.  See    Chandler    v.    Bacon,    30 
Fed.  Rep.  538;  Hayward  v.  Leeson, 
176  Mass.  310,  322,  57  N.  E.  656,  49 
L.  R.  A.  725 ;  Emery  v.  Parrott,  107 
Mass.   95,   100,    104;    Nant-Y-Glo  & 
Blaina  Ironworks  Co.   v.  Grave,  L. 
R.  12  Ch.  Div.  738,  749,  750,  and  see 
ante,  §  165. 

78.  See  ante,  §  166. 

79.  See  post,  §  288-289. 

80.  See  post,  §  290. 


330  THE  LAW  OF  PROMOTERS. 

of  the  corporation  to  rescind  its  purchase  because  of  a  secret  com- 
mission paid  by  the  vendor  to  the  promoters,  are  discussed  at 
greater  length  in  a  subsequent  chapter.81 

§  175.  Remedies  in  case  of  fraudulent  representations. 

A  promoter  guilty  of  making  fraudulent  representations  to  the 
corporation  may  be  sued  at  law  for  fraud  and  deceit.  It  is  in  such 
case  immaterial  whether  the  property  belonged  to  the  promoter 
or  another,  or  whether  the  promoter  gained  anything  by  his  repre- 
sentations.82 

A  sale  induced  by  the  false  representations  of  the  promoters 
may  be  set  aside  83  whether  or  not  the  representations  were  au- 
thorized by  the  vendor,  for  he  cannot  insist  on  the  validity  of  the 
sale  while  repudiating  the  fraud  by  which  it  was  induced.84 

If  it  is  shown  that  the  false  representations  which  induced  the 
purchase  by  the  corporation  were  made  by  the  promoters  with 
the  authority  of  the  vendor,  or  if  the  vendor  in  any  way  assisted 
the  promoters  in  defrauding  the  company,  he  may  be  held  liable 
with  the  promoters  as  a  joint  tort  feasor.85 

If  the  false  representations  of  the  promoter,  complained  of  by 
the  corporation,  are  representations  made  by  the  promoter  in 
regard  to  the  cost  to  him  of  property  which  he  is  selling  to  the 
corporation,  he  may  be  compelled  to  account  for  the  whole  or  a 
part  of  his  profits  upon  such  sale  according  to  the  nature  of  his 
misrepresentations.86 

81.  See  post,  chapter  XVI.  1902,  2  Ch.  Div.  809,  and  see  post, 

82.  The  Telegraph   v.   Loetscher,      §  245. 

127  Iowa  383,  387,  101  N.  W.  773,  83.  Phosphate     Sewage     Co.     v. 

4  A.   &  E.   Ann.   Cas.   667,    (citing  Hartmont,  I/.R.  5  Ch.  Div.  394,  46 

Morawetz  on  Corporations,  §  546)  ;  L.  J.  Ch.  661,  and  see  post,  §  286. 

Second  National  Bank  v.  Greenville  84.  See  post,  §  286. 

Screw-Point   Steel  Fence   Post  Co.,  85.  See  post,  §  287.     As  to  false 

23  Ohio  C.  C.  274,  280;  In  re  Leeds  representations  generally,   see  postf 

&    Hanley    Theatres    of    Varieties,  chapter  XI. 

86.  See  ante,  §  162. 


REMEDIES  OF  CORPORATION.  331 

There  is  some  authority  for  the  rule  that  a  promoter  who 
falsely  represents  that  a  certain  number  of  shares  of  a  corpora- 
tion have  been  subscribed  for,  may  be  compelled  to  take  and  pay 
for  a  sufficient  number  of  shares  to  make  his  representation  good : 
but  the  weight  of  authority  seems  to  be  that  no  contract  with  the 
corporation  arises  from  such  a  representation,  and  that  the  only 
liability  of  the  promoter  is  one  for  damages  to  such  persons  as 
may  have  been  deceived  by  his  representation.87 

It  is  held  in  one  case  that  promoters  who  falsely  represent  that 
the  liabilities  of  one  of  the  constituent  companies  taken  into  a 
consolidation,  do  not  exceed  a  sum  named,  may  be  compelled  to 
indemnify  the  consolidated  company  against  the  payment  of  any 
liabilities  in  excess  of  that  sum.88 

§  176.  Liability  of  directors,  officers,  etc. 

It  has  been  held  that  directors  who  cause  unlawful  payments  to 
be  made  to  a  promoter  become  liable  to  the  corporation  for  the 
repayment  of  all  sums  so  paid.89  The  officers  of  the  corporation 
may  likewise  become  personally  liable  because  of  a  payment  un- 
lawfully made  by  them  to  the  promoter,  and  resort  may  no  doubt 
in  a  proper  case  be  had  to  the  sureties  upon  their  bonds.  In 
First  Avenue  Land  Co.  v.  Hildebrand,90  Hildebrand  had  received 
authority  from  the  owner  to  sell  certain  property  at  $2500  an  acre, 
it  being  agreed  that  Hildebrand  should  receive  as  his  commission 
all  that  he  obtained  beyond  that  price.  He,  together  with  four 
others,  organized  a  corporation  to  purchase  the  land  at  $2700  per 
acre.  The  profit,  amounting  to  $8250,  was  divided  among  the  five 
promoters  in  various  amounts.  Four  of  the  promoters  subscribed 

87.  See  post,  §  215.  88.  O'Sullivan     v.     Clarkson,     9 

As  to  the  remedy  for  false  certl-  Ont.  W.  R.  46. 

ficates   as   to   the   amount   actually  89.  In  re  Anglo-French  Co-opera- 
paid   in,   see   Hequembourg   v.    Ed-  tive  Society,  L.  R.  21  Ch.  Div.  492. 
wards  (Mo.)  50  S.  W.  908,  and  cases  And  see  Gray  v.  Heinze,  82  N.  Y. 
cited,   (reversed,  155  Mo.  514,  56  S.  Misc.  618,  144  Supp.  1045. 
W.  490),  and  see  post,  §  201n.  90.  103  Wis.  530,  79  N.'W.  753. 


332  THE  LAW  OF  PROMOTERS. 

for  the  stock  of  the  new  corporation.  Hildebrand,  who  had  been 
made  treasurer  of  the  company,  credited  their  respective  portions 
of  the  profits  against  the  subscriptions  of  these  four  promoters, 
two  of  them  whose  portion  of  the  profits  exceeded  their  subscrip- 
tion receiving  a  small  balance  in  cash.  The  fifth  promoter,  one 
Seidenschwarz,  did  not  subscribe  for  any  stock,  and  was  paid  his 
entire  profit  in  cash.  Hildebrand  made  a  report  as  treasurer,  in 
which  he  charged  himself  with  having  received  as  the  first  assess- 
ment on  the  stock  subscriptions,  the  sum  of  $22,680  instead  of  the 
$14,430  actually  received,  and  credited  himself  with  a  first  pay- 
ment on  the  land  of  $18,375  instead  of  the  $10,125  actually  paid. 
The  corporation,  on  discovering  the  facts,  brought  suit  against 
the  sureties  on  the  bond  given  by  Hildebrand  as  treasurer  of  the 
corporation.  The  court  held  that  the  treasurer's  report  was  not 
conclusive  upon  his  sureties,  and  that  the  latter  were  only  liable 
for  moneys  actually  received ;  that  the  sureties  were  not  liable  for 
the  payment  to  Seidenschwarz  because  that  payment  was  made 
before  the  bond  was  given ;  that  the  sureties  were  liable  for  the 
cash  balances  paid  to  two  of  the  other  promoters,  such  payments 
having  been  made  after  the  bond  was  given ;  that  the  crediting  of 
the  profits  against  the  stock  subscriptions  resulted  simply  in  the 
issue  of  stock  without  payment,  that  the  promoters  receiving  such 
stock  were  liable  therefore  to  the  corporation;  that  it  might  be 
that  if  it  were  shown  that  this  stock  had  been  transferred  to  inno- 
cent parties  and  that  the  corporation  was  unable  to  make  collec- 
tion, the  treasurer  and  his  sureties  would  be  liable.  No  such  show- 
ing having  been  made  the  judgment  in  favor  of  the  plaintiff  was 
reversed  and  a  new  trial  granted. 

§  177.  Cancellation  of  secret  agreements. 

In  Fred  Macey  Co.  v.  Macey,91  the  defendant,  one  of  the  pro- 

91.  143  Mich.  138,  106  N.  W.  722,      115  N.  W.  966. 
5  L.  R.  A.  N.  S.  1036,  152  Mich.  164, 


REMEDIES  OF  CORPORATION.  333 

moters  of  the  plaintiff  corporation,  had  in  the  course  of  the  or- 
ganization of  the  company,  without  the  knowledge  of  the  subscrib- 
ers, obtained  a  contract  which  purported  to  obligate  the  company 
to  pay  him  royalties  on  the  patents  which  it  was  organized  to  prac- 
tice. A  bill  in  equity  demanding  the  cancellation  of  this  agree- 
ment was  held  good  upon  demurrer. 

§  178.  Adequate  remedy  to  be  freely  granted. 

It  should  in  closing  this  chapter  on  the  remedies  of  the  corpo- 
ration be  said  that  when  a  promoter  "  has  committed  a  breach  of 
trust,  there  is  no  occasion  to  be  over-solicitous  to  see  that  the 
faithless  fiduciary  should  not  make  reparation  for  the  wrong 
done,"  92  and  that  when  once  it  has  been  shown  that  a  promoter 
has  been  guilty  of  a  fraud  upon  the  corporation,  the  courts  will 
make  every  possible  effort  to  find  some  adequate  remedy  for  the 
wrong. 

92.  Old    Dominion    Copper,    etc.,      88  N.  E.  198,  40  L.  R.  A.  N.  S.  314. 
Co.  v.  Bigelow,  203  Mass.  159,  202, 


CHAPTER  X. 

OF  SUITS  BY,  OR  ON  BEHALF  OF,  CORPORATION. 

Section  179.  Introductory. 

180.  Suits  by  the  corporation. 

181.  Suits  by   receiver  of  corporation. 

182.  Minority  stockholders'  suits. 

183.  Stockholders'  suits  after  receivership. 

184.  Suits  by  stockholders  other  than  original  subscribers. 

185.  Further   of  minority  stockholders'  suits. 

186.  The  same  subject. — Judicial  discretion. 

187.  Rescission  at  suit  of  minority  stockholder. 

188.  Minority  stockholder  intervening  to  defend  suit  against  cor- 
poration. 

189.  Suits  by  creditors  of  corporation. 

190.  Parties  defendant. 

191.  Actions  against  presonal  representatives  of  deceased  promoter. 

192.  Parties  defendant    in  minority  stockholders'   suits. 

193.  Suits  at  law  and  in  equity. 

194.  The  same  subject. — Rescission. 

195.  Joinder  of  actions. 

196.  Actions  against  promoters,  transitory. 

197.  Conflict  of  laws. 

§  179,  Introductory. 

Questions  as  to  the  proper  parties  to  maintain  a  suit  for  the 
redress  of  wrongs  done  to  the  corporation  by  its  promoters,  as  to 
the  parties  to  be  joined  as  defendants,  and  other  matters  incidental 
to  such  suits,  arise  from  time  to  time.  It  is  proposed  in  this 
chapter  briefly  to  discuss  these  questions. 

§  180.  Suits  by  the  corporation. 

It  might,  at  the  present  day,  seem  unnecessary  to  state  that  an 

(334) 


SUITS  BY  CORPORATION.  335 

action  to  redress  a  wrong  done  to  a  corporation  by  its  promoters, 
may  be  maintained  by  the  corporation  itself.  This  proposition 
was,  however,  at  one  time  vigorously  contested.  It  was  claimed  in 
Phosphate  Sewage  Co.  v.  Hartmont,1  that  the  plaintiff  corpora- 
tion "  was  a  fluctuating  body  "  and  that  it  might  be  that  no  per- 
son who  was  a  member  at  the  time  of  the  transaction  complained 
of,  remained  a  member  of  the  plaintiff  corporation  at  the  time  of 
the  suit.  The  vice  chancellor  held  that  he  was  bound  to  consider 
the  company  as  a  body  having  perpetual  existence,  and  that  he 
was  not  at  liberty  to  go  into  the  question  of  the  individuals  of 
whom  it  was  composed.2  A  similar  plea  was  made,  and  likewise 
overruled  in  New  Sombrero  Phosphate  Co.  v.  Erlanger.3 

It  is,  however,  held  in  a  recent  Maryland  case  that  a  suit  aris- 
ing out  of  a  wrong  done  to  the  corporation  by  its  promoters,  can- 
not be  maintained  by  a  receiver  of  the  corporation,  unless  it  ap- 
pears that  some  of  those  who  held  shares  at  the  time  of  the  suit, 
held  their  shares  at  the  time  of  the  wrong  complained  of.4  This 
ruling  rests  upon  a  complete  misapplication  of  the  authorities 
cited  and  may  safely  be  disregarded.5 

It  is  now  well  settled  that  the  taking,  by  the  promoters,  of  a 
secret  profit,  or  the  unlawful  sale  by  them  of  their  own  property  to 
the  corporation,  or  the  commission  by  the  promoters  of  any  other 
fraud  upon  the  corporation,  is  an  injury  to  the  company  in  its 

1.  L.   R.  5  Ch.   Div.  394,  440,  46  216,  28  Sup.  Ct.  634,  52  L.  Ed.  1025, 
L.  J.  Ch.  661.  and  cases  cited. 

2.  Citing   Charitable   Corporation  3.  L.  R.  5  Ch.  Div.  73,  121,  122, 
v.  Sutton,  2  Atk.  400;   Society  for  25   W.    R.   436,   affirmed,   *w6   nom. 
Illustration  of  Practical  Knowledge  Erlanger    v.    New    Sombrero    Phos- 
v.    Abbott,   2   Beav.   559;    McKay's  phate  Company,  L.  R.  3  App.  Cas. 
case,  L.  R.  2  Ch.  Div.  1 ;  Overend  &  1218,  6  Eng.  Rul.  Cas.  777,  39  L.  T. 
Gurney  Co.  v.  Gibb,  L.  R.  5  H.  L.  N.  S.  269,  27  W.  R.  65. 

480;    Lindsay    Petroleum    Company  4.  Tompkins  v.    Sperry,   Jones  & 

v.  Hurd,  L.  R.  5  P.  C.  221.  Co.,  96  Md.  560,  583-584,  54  Atl.  254. 

See   also    Old   Dominion   Copper,  5.  This  question  is  discussed  at 

etc.,  Co.  v.  Lewisohn,  210  U.  S.  206,  greater  length  in  §  184,  post. 


336 


THE  LAW  OF  PROMOTERS. 


corporate  capacity  and  gives  rise  to  a  cause  of  action  which  may 
be  prosecuted  by  the  corporation  6  or  its  assignee.7 

§  181.  Suits  by  the  receiver  of  the  corporation. 

A  suit  may,  after  the  company  has  gone  into  the  hands  of  a 
receiver,  be  prosecuted  by  him.8     The  suit  must,  however,  in  some 


6.  Federal. — Commonwealth  S.  S. 
Co.  v.  American  Shipbuilding  Co., 
197  Fed.  Rep.  797,  805,  affirmed,  215 
Fed.  Rep.  296,  131  C.  C.  A.  596. 

Alabama. — Moore  v.  Warrior  Coal 
&  Land  Co.,  178  Ala.  234,  59  So.  219, 
Am.  &  Eng.  Ann.  Cas.,  1915  B.  173. 

Arizona. — Hughes  v.  Cadena  De 
Cobre  Min.  Co.,  13  Ariz.  52,  61,  108 
Pac.  231,  236. 

Connecticut. — Yale  Gas  Stove 
Company  v.  Wilcox,  64  Conn.  101, 
128-129,  29  Atl.  303,  25  L.  R.  A. 
90,  42  Am.  St.  Rep.  159,  47  Am.  & 
Eng.  Corp.  Cas.  647. 

Massachusetts. — O  1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  203 
Mass.  159,  192,  89  N.  E.  193,  40  L. 
R.  A.  N.  S.  314. 

Missouri. — Exter  v.  Sawyer,  146 
Mo.  302,  324,  47  S.  W.  951,  956- 
957. 

New  Jersey. — Arnold  v.  Searing, 
78  N.  J.  Eq.  146,  161-163,  78  Atl. 
762,  768-769;  Bigelow  v.  Old  Do- 
minion Copper,  etc.,  Co.,  74  N.  J. 
Eq.  457,  506,  71  Atl.  153. 

New  Yorfc. — Colton  Improvement 
Co.  v.  Richter,  26  Misc.  26,  31,  55 
Supp.  486. 

Oregon. — Wills  v.  Nehalem  Coal 
Company,  52  Or.  70,  77-78,  86,  96 
Pac.  528,  531,  534. 

Pennsylvania. — Simons  v.  Vulcan 
Oil  &  Mining  Company,  61  Pa.  202, 
221,  100  Am.  Dec.  628. 


•  Wisconsin. — Pittsburg  Mining 
Company  v.  Spooner,  74  Wis.  307, 
321,  42  N.  W.  259,  261,  17  Am.  St. 
Rep.  149,  24  Am.  &*Eng.  Corp.  Cas. 
1;  Hebgen  v.  Koeffler,  97  Wis.  313, 
320,  72  N.  W.  745,  747. 

See  also  cases  cited  in  notes  1,  2 
and  3,  supra. 

7.  See  Commonwealth  S.  S.  Co.  v. 
American  Shipbuilding  Co.,  197  Fed. 
Rep.   780,   794;   same  v.   same,   197 
Fed.    Rep.    797,    affirmed,   215   Fed. 
Rep.  304,  131  C.  C.  A.  604;  Bigelow 
v.  Old  Dominion  Copper,  etc.,  Co.,  74 
N.  J.  Eq.  457,  490,  71  Atl.  153. 

There  might  be  some  difficulty  in 
the  way  of  allowing  the  company's 
assignee  to  maintain  a  suit  for  the 
rescission  of  its  purchase,  but  where 
the  corporation  has  been  reorganized 
or  merged  with  other  corporations, 
its  purchase  may  be  rescinded  at 
the  suit  of  the  successor  company. 
American  Shipbuilding  Co.  v.  Com- 
monwealth S.  S.  Co.,  215  Fed.  Rep. 
304,  131  C.  C.  A.  604,  affirming,  197 
Fed.  Rep.  797;  same  case  on  de- 
murrer, 197  Fed.  Rep.  780,  794. 

8.  Hayward  v.  Leeson,  176  Mass. 
310,  57  N.  E.  656,  49  L.  R.  A.  725; 
Tompkins   v.    Sperry,   Jones   &  Co., 
96    Md.    560,    583-584,    54    Atl.    254, 
258-259;    Arnold   v.    Searing,   78  N. 
J.  Eq.  146,  161,  78  Atl.  762. 

As  to  suits  by  receivers  appointed 
in  another  jurisdiction,  see  Converse 


SUITS  BY  CORPORATION. 


337 


jurisdictions,  be  brought  by  the  receiver  in  the  name  of  the  corpo- 
ration.9 

§  182.  Minority  stockholders'  suits. 

It  frequently  happens  that  a  corporation  continues,  after  its 
complete  organization,  under  the  control  of  its  promoters,  who 
naturally  prevent  its  bringing  suit  against  themselves.  It  then 
becomes  necessary  for  the  minority  stockholders  to  prosecute  the 
company's  claim.10 

While  a  lengthy  discussion  of  the  subject  of  minority  stock- 
holders' suits  would  be  out  of  place,  a  brief  reference  to  some  of 


v.  Hamilton,  224  U.  S.  243,  257,  32 
Sup.  Ct.  415,  56  L.  Ed.  749,  Am.  & 
Eng.  Ann.  Gas.,  1913  D.  1292,  and 
cases  cited. 

9.  Hayward  v.  Leeson,  176  Mass. 
310,  324-325,  57  N.  E.  656,  49  L.  R. 

A.  725;  Wilson  v.  Welch,  157  Mass. 
77,  80,  31  N.  E.  712,  and  cases  cited. 
Homer  v.  Barr  Pumping  Engine  Co., 
ISO  Mass.  163,  61  N.  E.  883,  91  Am. 
St.  Rep.  269,  and  cases  cited. 

Proceedings  erroneously  com- 
menced in  the  name  of  the  receiver 
may  be  amended  by  substituting 
the  corporation  as  plaintiff. 

Hayward  v.  Leeson,  176  Mass. 
310,  326,  57  N.  E.  656,  49  L.  R.  A. 
725;  Wilson  v.  Welch,  157  Mass.  77, 
81,  31  N.  E.  712;  Philadelphia  & 
Reading  Coal  &  Iron  Co.  v.  Butler, 
181  Mass.  468,  63  N.  E.  949;  East 
Tennessee  Land  Co.  v.  Leeson,  178 
Mass.  206,  59  N.  E.  639;  Arnold  v. 
Searing,  78  N.  J.  Eq.  146,  162-163, 
78  Atl.  762,  769. 

10.  Alabama. — Moore   v.   Warrior 
Coal  &  Land   Co.,  178  Ala.  234,  69 
So.  219,  Am.  &  Eng.  Ann.  Cas.,  1915 

B.  173. 

Missouri. — Exter   v.    Sawyer,   146 


Mo.  302,  324,  47  S.  W.  951,  956,  '957. 

New  Jersey. — Arnold  v.  Searing, 
73  N.  J.  Eq.  262,  269,  67  Atl.  831; 
same  v.  same,  78  N.  J.  Eq.  146,  161, 
78  Atl.  762 ;  Groel  v.  United  Electric 
Co.  of  N.  J.,  70  N.  J.  Eq.  616,  623, 
61  Atl.  1061. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  87,  96  Pac.  528,  534. 

Pennsylvania. — McAleer  v.  Mc- 
Murray,  6  Phila.  244. 

Wisconsin. — Hebgen  v.  Koeffler, 
97  Wis.  313,  72  N.  W.  745;  Pietsch 
v.  Milbratb,  123  Wis.  647,  101  N.  W. 
388,  102  N.  W.  342,  68  L.  R.  A.  945, 
107  Am.  St.  Rep.  1017;  Simon  v. 
Weaver,  143  Wis.  330,  127  N.  W. 
950. 

United  Kingdom  and  Colonies. — 
Hichens  v.  Congreve,  4  Russ.  562, 
575.  See  also  Burland  v.  Earle,  1902, 
App.  Cas.  83,  93;  Foss  v.  Harbottle, 
(1831),  2  Hare  461,  491^95. 

See  cases  cited  in  succeeding  notes, 
and  see  note  to  Yale  Gas  Stove  Co. 
v.  Wilcox,  25  L.  R.  A.  102. 

The  plaintiff  is,  if  successful  in 
his  suit,  entitled  to  reimbursement 
for  attorneys'  fees  and  other  ex- 
penses, to  be  paid  out  of  the  moneys 


338 


THE  LAW  OF  PROMOTERS. 


the  rules  applicable  thereto  may  not  be  amiss.11  A  minority  stock- 
holder maintaining  a  suit  for  the  benefit  of  the  corporation,  must 
allege  and  prove  a  request  made  to  the  board  of  directors  that 
they  cause  the  corporation  to  bring  the  suit  and  the  refusal  of  the 
directors  so  to  do,12  or  that  the  directors  or  a  majority  of  them 


recovered  for  the  corporation.  Gra- 
ham v.  Machine  Works,  138  Iowa 
456,  114  N.  W.  619,  15  L.  R.  A.  N. 
S.  729;  Forrester  v.  Boston  &  Mon- 
tana Con.  Copper,  etc.,  Co.,  29  Mont. 
397,  74  Pac.  1088,  76  Pac.  211. 

11.  As  to  minority   stockholders' 
suits  in  general,  see  note  to  Johns 
v.  McLester,  97  Am.  St.  Rep.  27. 

Whether  a  minority  stockholders' 
action  may  be  maintained  by  the 
mere  equitable  owner  of  shares  not 
transferred  to  him  upon  the  books 
of  the  company  is  a  question  of 
some  doubt.  To  the  effect  that  the 
suit  may  be  maintained  by  the  un- 
registered holder  of  shares,  see  Par- 
rott  v.  Byers,  40  Cal.  614,  625 ;  Bag- 
shaw  v.  Eastern  Union  Ry.,  7  Hare 
114,  132,  affirmed,  2  Mac.  &  G.  389, 
19  L.  J.  Ch.  N.  S.  410,  and  see  The 
Great  Western  Ry.  Co.  v.  Rushout, 
5  DeGex  &  Sm.  290.  To  the  con- 
trary, see  Heath  v.  Erie  Railway 
Company,  8  Blatch.  347,  11  Fed.  Gas. 
976,  999 ;  Brown  v.  Duluth  M.  &  N. 
Ry.  Co.,  53  Fed.  Rep.  889,  894. 

The  question  is  left  open  in  Moore 
v.  Silver  Valley  Mining  Company, 
104  N.  C.  534,  544,  10  S.  E.  679,  682- 
683,  and  in  Mills  v.  Northern  Rail- 
way of  Buenos  Ayres  Co.,  L.  R,  5 
Ch.  App.  621,  628. 

12.  Federal. — Krohn   v.   William- 
son, 62  Fed.  Rep.  869,  872-873,  af- 
firmed,    sub    nom.    Williamson    v. 


Krohn,  66  Fed.  Rep.  655,  13  C.  C.  A. 
668,  31  U.  S.  App.  325;  Dimpfel 
v.  Ohio  &  Miss.  Ry.  Co.,  110  U.  S. 
209,  3  Sup.  Ct.  573,  28  L.  Ed.  121; 
Robinson  v.  West  Virginia  Loan  Co., 
90  Fed.  Rep.  770;  Hawes  v.  Oak- 
land, 104  U.  S.  450,  461,  26  L.  Ed. 
827;  Whitney  v.  Fairbanks,  54  Fed. 
Rep.  985. 

California. — Burbank  v.  Dennis, 
101  Cal.  90,  105,  35  Pac.  444,  449. 

Massachusetts. — Peabody  v.  Flint, 
88  Mass.  52,  56. 

Missouri. — Exter  v.  Sawyer,  146 
Mo.  302,  319,  47  S.  W.  951,  956-957 ; 
Vogeler  v.  Punch,  205  Mo.  558,  103 
S.  W.  1001. 

New  Jersey. — Knoop  v.  Bohmrich, 
49  N.  J.  Eq.  82,  84,  23  Atl.  118, 
affirmed,  sub  nom.  Bohmrich  v. 
Knoop,  50  N.  J.  Eq.  485,  27  Atl. 
636. 

New  fork. — Colton  Improvement 
Co.  v.  Richter,  26  Misc.  26,  31,  55 
Supp.  486 ;  Langdon  v.  Fogg,  14  Abb. 
N.  C.  435;  Corning  v.  Barrett,  22 
Misc.  241,  48  Supp.  1013 ;  Greaves  v. 
Gouge,  69  N.  Y.  154. 

Oregon. — Wills  v.  Nehalem,  52  Or. 
70,  87,  96  Pac.  528,  534. 

Wisconsin. — Franey  v.  Warner,  96 
Wis.  222,  227,  71  N.  W.  81,  82-83. 

As  to  pleading  the  request  and 
refusal,  see  Continental  Securities 
Co.  v.  Belmont,  206  N.  Y.  7,  99  N. 


SUITS  BY  CORPORATION. 


339 


are  themselves  the  persons,  or  subject  to  the  control  of  the  persons, 
against  whom  the  suit  is  brought.13  A  request  to  such  directors 
that  they  institute  suit  would  presumably  be  refused,14  and  if  it 
should  be  granted  the  litigation,  being  under  the  control  of  per- 
sons opposed  to  its  success,  would  be  necessarily  unsatisfactory 
and  inconclusive.15  The  right  to  maintain  a  minority  stockholder's 
suit  may  also  rest  upon  any  other  state  of  facts  which  renders  it 
reasonably  certain  that  a  suit  by  the  corporation  would  be  impos- 
sible or  inexpedient.16 

That  the  board  of  directors  is  subject  to  the  control  of  the 
parties  to  be  sued  may  be  inferred  from  the  fact  that  such  parties 
are  the  holders  of  a  great  majority  of  the  corporate  stock.17  A 
suit  on  behalf  of  the  corporation  may  be  maintained  by  the  mi- 
nority stockholders  even  though  the  plaintiff  stockholders  them- 
selves constitute  or  control  the  majority  of  the  directors,  if  the  de- 
fendants, on  the  other  hand,  control  a  majority  of  the  stock.  It  is 
in  such  case  clear  that  any  suit  instituted  by  the  corporation  would 
be  suppressed  by  the  defendants  as  soon  as  a  new  board  of  di- 
rectors could  be  elected.18 


E.  138,  51  L.  R.  A.  N.  S.  112,  Am. 
&  Eng.  Ann.  Cas.,  1914  A.  777. 

13.  See   cases   cited   iu   notes   14 
and  15. 

14.  Mason  v.  Carrothers,  105  Me. 
392,  409,  74  Atl.  1030,  1037;  Knoop 
v.   Bohmrich,   49   N.   J.   Eq.   82,   84, 
23    Atl.     118,    affirmed,    sub    nom. 
Bohmrich    v.    Knoop,   50   N.    J.    Eq. 
485,  27  Atl.  636;  Wills  v.  Nehalem 
Coal  Company,  52  Or.  70,  87,  96  Pac. 
528,  534,    (citing  Pomeroy's  Equity 
Jurisprudence,    (3rd.    Ed.),   Vol.    3, 
§  1095)  ;  Franey  v.  Warner,  96  Wis. 
222,  227,  71  N.  W.  81,  82-83. 

See,   however,   Brewer   v.    Boston 
Theatre,  104  Mass.  378,  388. 

15.  Brewer    v.    Boston    Theatre, 
104  Mass.  378,  387 ;  Kuoop  v.  Bohm- 


rich, 49  N.  J.  Eq.  82,  85,  23  Atl.  118, 
affirmed,  sub  nom.  Bohmrich  v. 
Knoop,  50  N.  J.  Eq.  485,  27  Atl.  636; 
Brinckerhoff  v.  Bostwick,  88  N.  Y. 
52,  59;  Averill  v.  Barber,  25  N.  Y. 
St.  Rep.  194,  6  Supp.  255,  2  Silv. 
40,  53  Hun  636;  Corning  v.  Barrett, 
22  N.  Y.  Misc.  241,  48  Supp.  1013; 
Simon  v.  Weaver,  143  Wis.  330,  127 
N.  W.  950. 

16.  Wills  v.  Nehalem  Coal  Com- 
pany, 52  Or.  70,  87-88,  96  Pac.  528, 
534-535,   quoting   Pomeroy's    Equity 
Jurisprudence,    (3rd.    Ed.),    Vol.   3, 
§  1095. 

17.  Wills  v.  Nehalem  Coal  Com- 
pany, 52   Or.   70,   88,   96   Pac.   528, 
535. 

18.  Mason  v.  Carrothers,  105  Me. 


340  THE  LAW  OF  PROMOTERS. 

A  question  on  which  there  is  some  uncertainty  is  that  of  the  nec- 
essity of  showing  a  demand  to  bring  suit,  not  only  upon  the  board 
of  directors,  but  upon  the  stockholders  as  well.  The  law  seems  to 
be  that  in  the  ordinary  case,  where  the  means  o.f  redress  lies  in  the 
hands  of  the  board  of  directors  and  the  stockholders  have  no 
power  or  authority  in  relation  thereto,  a  demand  upon' the  stock- 
holders would  be  useless  and  unnecessary  and  need  not  be  alleged 
or  proved.  If  the  subject  matter  of  the  stockholders'  complaint  is 
for  any  reason  within  the  immediate  control  of  the  vote  of  the 
stockholders  the  matter  must  be  brought  to  their  attention  before 
suit  is  commenced  unless,  of  course,  it  appears  from  the  facts  that 
such  application  could  not  be  expected  to  receive  fair  consider- 
ation.19 

§  183.  Stockholders'  suits  after  receivership. 

After  the  company  has  gone  into  the  hands  of  a  receiver,  the 
stockholders  may,  in  case  of  the  receiver's  refusal  to  bring  suit 
against  the  promoters,  maintain  a  suit  as  stockholders,  joining  the 
receiver,  the  corporation  and  the  guilty  promoters  as  parties  de- 
fendant.20 The  stockholders  must,  in  such  case,  prove  that  they 
have  an  actual  interest  in  the  prosecution  of  the  suit,  and  would 
as  stockholders  be  the  gainers  by  a  recovery,  in  other  words,  that 

392,   409,    74   Atl.    1030,    1037.     Of.  See  note  to  Continental  Securities 

Brewer  v.  Boston  Theatre,  104  Mass.  Co.   v.   Belmont,   Am.   &   Eng.   Ann. 

378,  389,  et  seq.  Cas.,   1914  A.   777,   782.     Also  note 

19.  Brewer    v.    Boston    Theatre,  to  same  case,  51  L.  R.  A»  N.  S.  112. 

104    Mass.    378,    387 ;    Continental  20.  Porter  v.  Sabin,  149  U.  S.  473, 

Securities  Co.  v.  Belmont,  206  N.  Y.  13   Sup.   Ct.   1008,   37   L.    Ed.   815 ; 

7,  16-19,  99  N.  E.  138,  51  L.  R.  A.  Ackerman  v.   Halsey,  37  N.  J.  Eq. 

N.   S.  112,   Am.   &  Eng.  Ann.   Cas.,  356,  362,  affirmed,  sub  nom.  Halsey 

1914  A.  777,  affirming,  150  N.  Y.  App.  v.    Ackerman,    38    N.    J.    Eq.    501 ; 

Div.  298,  134  Supp.  635.     But  see,  Brinckerhoff  v.  Bostwick,  88  N.  Y. 

however,  Hawes  v.  Oakland,  104  TJ.  52. 

S.    450,    461,    26    L.    Ed.    827,    and  For  a  suit  after  bankruptcy,  see 

Moore  v.  Silver  Valley  Mining  Co.,  Meyer  v.  Page,  112  N.  Y.  App.  Div. 

104  N.  C.  534,  10  S.  E.  679.  625,  627,  98  Supp.  739. 


SUITS  BY  CORPORATION.  341 

there  will,  in  the  case  of  a  recovery  against  the  promoters,  be  a 
surplus  for  distribution  among  the  stockholders.21 

If,  after  paying  the  debts,  there  remains  in  the  hands  of  the  re- 
ceiver a  surplus  to  be  apportioned  pro  rata  among  the  sharehold- 
ers, an  innocent  stockholder  may  bring  a  suit  for  the  cancellation 
of  such  shares  as  were  unlawfully  issued  to  the  promoters,  thereby 
increasing  the  moneys  to  be  distributed  among  the  bona  fide  stock- 
holders.22 

§  184.  Suits  by  stockholders  other  than  original  subscribers. 

A  minority  stockholder  suing  in  the  Federal  courts  must  allege 
that  he  was  a  shareholder  at  the  time  of  the  transaction  of  which 
he  complains,  or  that  his  shares  have  devolved  on  him  since  by 
operation  of  law,  and  that  the  suit  is  not  a  collusive  one  to  confer, 
on  a  court  of  the  United  States,  jurisdiction  of  a  case  of  which  it 
would  not  otherwise  have  cognizance.23  As  the  transactions  of  the 
promoters  are  generally  consummated  before  the  shares  of  the 
corporation  have  to  any  considerable  extent  been  dealt  in,  this  rule 
in  practical  effect  confines  minority  stockholders'  suits  against 
promoters,  to  the  original  subscribers. 

This  rule  of  the  Federal  courts,  first  announced  in  Hawes  v. 
Oakland,24  and  subsequently  embodied  in  Equity  Rule  No.  94, 

21.  Darragh  v.  Wetter  Mfg.  Co.,  Robinson    v.    West    Virginia    Loan 
78  Fed.  Rep.  7,  15-16,  23  C.  C.  A.  Company,  90  Fed.  Rep.  770;  Whit- 
609,   49   U.    S.   App.   1;   Corning   v.  ney  v.  Fairbanks,  54  Fed.  Rep.  985. 
Barrett,  22  N.  Y.  Misc.  241,  48  Supp.  Rules  of  Practice  in  Equity,  No.  94. 
1013;   Bentinck   v.   Fenn,   L.   R.   12          For   the   purpose   of   determining 
App.    Cas.    652,    664-665,    666-667,  the     jurisdiction     of     the     Federal 
671-672.  courts,  the  amount  involved  in  the 

22.  Weber  v.  Nichols,  75  N.  J.  Eq.  minority  stockholders'  suit  is  to  be 
117,  75  Atl.  997.  taken    as    the   amount   claimed    on 

23.  Hawes  v.  Oakland,  104  U.  S.  behalf  of  the  corporation  and  not 
450,   452,    et   seq.,   26   L.    Ed.    827;  the  minority   stockholders'   interest 
Dimpfel  v.  Ohio  &  Miss.  Ry.  Co.,  110  therein.    Hill  v.  Glasgow  R.  R,  Co., 
U.  S.  209,  3  Sup.  Ct.  573,  28  L.  Ed.  41  Fed.  Rep.  610.     Foster's  Federal 
121;  Taylor  v.  Holmes,  127  U.   S.  Practice,  §  16-J. 

489,  32  L.  Ed.  179,  8  Sup.  Ct.  1192 ;          24.  104  U.  S.  450,  26  L.  Ed.  827. 


342 


THE  LAW  OF  PROMOTERS. 


seems  to  be,  not  a  general  principle  of  law  applicable  to  pleadings 
in  all  courts,  but  a  rule  adopted  to  save  the  Federal  courts  from 
the  burden  of  cases  not  properly  within  their  jurisdiction.  Many 
of  the  state  courts,  accepting  this  view  of  the  rule,  hold  that  it  has 
no  application  to  a  suit  in  the  state  courts.25 

Some  state  courts,  however,  follow  the  rule  of  Hawes  v.  Oak- 
land, in  most  cases  without  discussion.26  In  Home  Fire  Ins.  Co.  v. 
Barber,27  however,  the  court  stated  that  the  rule,  while  designed 
in  part  to  prevent  collusive  proceedings  in  fraud  of  the  jurisdic- 
tion of  the  Federal  courts,  goes  far  beyond  the  requirements  of 
such  a  purpose.  "  If  that  were  the  sole  purpose  of  the  rule,  it 
should  go  no  further  than  to  prevent  such  suits  where  the  vendor 
of  the  stock  was  a  citizen  of  the  same  state  as  the  corporation.  If 
the  vendor  and  purchaser  were  citizens  of  the  same  state,  and  the 


25.  Alabama. — Parson  v.  Joseph, 
92  Ala.  403,  8  So.  788;  Montgomery 
L.  &  P.  Co.  v.  Lahey,  121  Ala.  131, 
25  So.  1006. 

Idaho. — Just  v.  Idaho  Canal  & 
Imp.  Co.,  16  Idaho  639,  102  Pac. 
381,  133  Am.  St.  Rep.  140. 

Montana. — Forrester  v.  Boston  & 
M.  Consol.  Copper  &  Silver  Mining 
Co.,  21  Mont.  544,  565,  55  Pac.  229, 
353. 

New  Hampshire. — W  i  n  s  o  r  v. 
Bailey,  55  N.  H.  218. 

New  York. — Pollitz  v.  Gould,  202 
N.  Y.  11,  14,  94  N.  E.  1088,  38  L.  R. 
A.  N.  S.  988,  Am.  &  Eng.  Ann.  Gas., 
1912  D.  1098;  Continental  Securities 
Co.  v.  Belmont,  206  N.  Y.  7,  99  N.  E. 
138,  51  L.  R.  A.  N.  S.  112,  Am.  & 
Eng.  Ann.  Gas.,  1914  A.  777;  Con- 
tinental Securities  Co.  v.  Belmont, 
83  Misc.  340,  355-356,  144  Supp.  801, 
811,  affirmed,  168  App.  Div.  483,  154 
Supp.  54. 

Oregon. — Wills   v.   Nehalem   Coal 


Company,  52  Or.  70,  82,  88,  96  Pac. 
528,  533,  535. 

Morawetz  on  Private  Corpora- 
tions, §§  269,  270.  See  also  note 
to  Pollitz  v.  Gould,  Am.  &  Eng.  Ann. 
Cas.,  1912  D.  1102. 

26.  C  olorad  o. — Boldenweck    v. 
Bullis,  40  Colo.  253,  90  Pac.  634. 

Georgia. — Alexander  v.  Searcy,  81 
Ga.  536,  8  S.  E.  630,  12  Am.  St.  Rep. 
337.  . 

Iowa. — Clark  v.  American  Coal 
Co.,  86  Iowa  436,  53  N.  W.  291,  17 
L.  R.  A.  557. 

New  Mexico. — Rankin  v.  South 
West  Brewery  &  Ice  Co.,  12  N.  M. 
54,  73  Pac.  614. 

North  Carolina. — Moore  v.  Silver 
Valley  Mining  Co.,  104  N.  C.  534, 
10  S.  E.  679.  ' 

See  also  note  to  Pollitz  v.  Gould, 
Am.  &  Epg.  Ann.  Cas.,  1912  D.  1098, 
1101. 

27.  67    Neb.    644,   657-658,   93   N. 


SUITS  BY  CORPORATION.  343 

vendor,  an  original  stockholder,  had  never  had  the  same  citizenship 
as  the  corporation,  no  fraud  on  the  jurisdiction  of  the  court  would 
be  possible,  and  in  such  case,  if  recovery  were  proper  and  the  pur- 
chaser's cause  were  meritorious,  it  would  be  highly 'unjust  for  the 
court  to  abrogate  its  jurisdiction.  *  *  *  *  The  rule  has 
its  foundation  in  a  sound  and  wholesome  principle  of  equity, — 
namely,  that  the  rules  worked  out  by  chancellors  in  furtherance  of 
right  and  justice  shall  not  be  used,  because  of  their  technical  char- 
acter, as  rules,  to  reach  inequitable  or  unjust  results." 

It  was  held  in  Tompkins  v.  Sperry  Jones,28  an  action  brought 
against  the  promoters  by  the  receivers  of  an  insolvent  corporation, 
that  an  allegation  that  some  of  "  the  present  bond  or  stockholders 
were  the  original  holders  of  those  securities  or  that  they  received 
them  from  the  defendants  or  from  either  of  them  "  is  necessary  to 
enable  the  receiver  to  maintain  his  suit.  This  extension  of  the 
rule  of  Hawes  v.  Oakland  seems  to  be  supported  neither  by  prin- 
ciple nor  authority. 

It  may  be  stated  without  fear  of  contradiction  that  even  in  the 
courts  of  the  United  States,  or  of  those  states  which  apply  the  rule 
of  Hawes  v.  Oakland,  it  would  in  any  case  be  sufficient  for  the 
plaintiff  to  show  that  he  had  subscribed  for  the  stock  at  the  time 
of  the  transaction  complained  of,  though  the  share  certificates; 
were  not  issued  to  him  until  a  later  date.  It  has  been  said  that  the 
rule  would  not  in  any  event  prevent  a  suit  by  an  original  subscriber, 
although  subscribing  for  his  stock  at  a  time  subsequent  to  the 
transactions  complained  of,  as  the  contractual  rights  of  such 
subscriber  with  the  corporation,  and  with  every  other  subscriber, 
are,  by  relation,  co-extensive  with  the  legal  existence  of  the  corpo- 
ration.29 

§  185.  Further  of  minority  stockholders'  suits. 

A  suit  against  the  promoters  cannot  be  maintained   for  the 

W.  1024,  60  L.  R.  A.  927,  934,  108  29.  See  Wills  v.  Nehalem  Coal 
Am.  St.  Rep.  716.  Company,  52  Or.  70,  83-86,  96  Pac. 

28.  96  Md.  560,  54  Atl.  254.  528,  534. 


344  THE  LAW  OF  PROMOTERS. 

benefit  of  the  corporation  by  a  minority  stockholder  who  was  him- 
self a  party  to,  or  who  acquiesced  in,  the  fraud  of  which  he  com- 
plains.30 As  the  transferee  of  shares  stands  in  the  shoes  of  his 
transferor  and  is  bound  by  his  acts,  an  action  on  behalf  of  the 
corporation  does  not  lie  at  the  suit  of  a  minority  stockholder  whose 
predecessors  in  title  would,  because  of  their  participation  or  ac- 
quiescence, be  debarred  from  maintaining  such  suit.31 

It  has  been  said  that  a  shareholder,  though  he  purchased  his 
shares  with  knowledge  of  the  promoters'  fraud,  may  successfully 
maintain  his  suit  as  a  minority  stockholder  if  his  transferor  was 
in  a  position  so  to  do.32  The  action  could  not  be  maintained  by 
a  shareholder  who  purchased  his  shares  for  the  purpose  of  bring- 
ing the  suit.33  If  the  plaintiff  purchased  his  shares  only  so  as  to 
bring  suit,  he  has  not  been  prejudiced  by  the  transaction  of  which 
he  complains.  If  a  person  actually  deems  the  stock  of  a  corpo- 
ration a  desirable  investment,  the  fact  that  this  stock  can  be  made 
more  valuable  by  a  suit  against  the  promoters,  is  no  reason  why 
he  should  not  purchase  the  stock  even  though  he  make  the  pur- 

30.  See  ante,  §  145.  v.  Rome,  Watertown  &  Ogdensburgh 

31.  See  ante,  §  145.  R.  R.  Co.,  30  Hun  (N.  Y.)  73;  Sayles 

32.  Lagunas  Nitrate  Company  v.  v.  Central  National  Bank  of  Rome, 
Lagunas  Syndicate,  1899,  2  Ch.  Div.  18  N.  Y.  Misc.  155,  41  Supp.  1063, 
392,  449,  by  Rigby,  L.  J.,  who  was,  reversed   on   another   ground,    (s«6 
however,  in  the  minority  on  the  de-  nom.    Sayles   v.    White),   18   N.    Y. 
cisive  points  of  the  case.  App.  Div.  590,  46  Supp.  194 ;  Moore 

See  Ellis  v.  Penn  Beef  Co.,  9  Del.  v.  Silver  Valley  Mining  Co.,  104  N. 

Ch.  213,  218,  80  Atl.  666,  668;  Pol-  C.  534,  545,  10  S.  E.  679,  683. 
litz  v.  Wabash  R.  R.,  150  N.  Y.  App.          See  note  to  Pollitz  v.  Gould,  Am. 

Div.  709,  713,  135  Supp.  785;  Young  &    Eng.    Ann.    Cas.,    1912    D.    1098. 

v.  Drake,  8  Hun  (N.  Y.)  61.  1102-1103. 

Contra,  Langdon  v.  Fogg,  14  Abb.         Compare  Pollitz  v.  Wabash  R.  R., 

N.  C.   (N.  Y.)   435,  citing  Hawes  v.  150  N.   Y.  App.   Div.   709,   713,   135 

Oakland,    104    U.    S.    450,    460-461,  Supp.  785,  where  the  court  seems  to 

26  L.  Ed.  827,  which  is  not  really  lose  sight  of  the  distinction  between 

in  point — see  preceding  section.  examining   into    the    motives    of    a 

33.  Boldenweck  v.  Bullis,  40  Col.  bona   fide   stockholder    in    bringing 
253,  90  Pac.  634 ;  Just  v.  Idaho  Can.  suit,  and  looking  into  the  motives  of 
&  Imp.  Co.,  16  Idaho  639,  102  Pac.  the   plaintiff  in  becoming  a   stock- 
381, 133  Am.  St.  Rep.  140 ;  Kingman  holder. 


SUITS  BY  CORPORATION.  345 

chase  with  such  suit  in  view,  but  if  the  stock  is  not  of  itself  de- 
sirable, and  the  intended  suit  is  the  sole  reason  for  the  purchase, 
the  plaintiff  can  save  himself  from  the  effects  of  the  promoters' 
transactions  by  not  purchasing  the  stock,  and  he  should  not  be 
heard  to  complain  of  the  promoters'  frauds. 

The  fact  that  the  plaintiff  had  as  promoter,  or  otherwise,  com- 
mitted a  fraud  upon  the  corporation  would  not  affect  his  right  to 
maintain  a  minority  stockholder's  suit  on  its  behalf,  based  upon  a 
distinct  and  independent  fraud  with  which  the  plaintiff  had  no 
Connection.34 

§  186.  The  same  subject — Judicial  discretion. 

It  has  been  said  that  "  it  is  a  matter  of  discretion  in  the  court 
whether  to  permit  a  suit  to  be  brought  by  a  stockholder  on  behalf 
of  his  corporation,  and  that  the  court  will  exercise  its  discretion, 
having  in  view  the  circumstances  of  the  parties,  their  relationship 
to  each  other  and  to  the  cause  of  action,  the  refusal  to  sue,  &c."  85 
The  purpose  of  a  minority  stockholder's  suit  is  to  prevent  those 
in  control  of  the  corporation  from  working  a  fraud.  If,  though 
the  corporation  has  a  good  cause  of  action  against  the  promoters, 
there  be  some  question  as  to  the  advisability  of  bringing  suit 
thereon,  the  court  will  not  interfere  with  the  determination  of  the 
directors  not  to  sue,  if  it  appears  that  such  determination  was  ar- 
rived at  by  a  fair  exercise  of  the  directors'  discretion.36 

§  187.  Rescission  at  suit  of  minority  stockholder. 

It  follows  from  what  is  said  in  the  preceding  section  that  there 
is  in  general  considerable  difficulty  in  maintaining  a  minority  stock- 
holder's suit  for  the  rescission  of  a  purchase  made  by  the  corpo- 

34.  Averill   v.   Barber,   25   N.   Y.      Supp.    369,    dissenting    opinion    of 
St.  Rep.  194,  197,  et  seq.,  6  Supp.      Hatch,  J. 

255,  2  Silv.  40,  53  Hun  636.  36.  Hawes  v.  Oakland,  104  U.  S. 

35.  Groel  v.  United  Electric  Co.  450,  456-457,  26  L.  Ed.  827;  Groel 
of  N.  J.,  70  N.  J.  Eq.  616,  626,  61  v.  United  Electric  Co.  of  N.  J.,  70 
Atl.  1061.    See  Hutchinson  v.  Simp-  N.    J.    Eq.   616,   623,   61   Atl.   1061 ; 
son,  92  N.  Y.  App.  Div.  382,  413,  87  Hutchinson    v.    Simpson,    92   N.    Y. 


346 


THE  LAW  OF  PROMOTERS. 


ration.37  The  advisability  of  rescinding  the  purchase  would  gen- 
erally be  a  matter  of  opinion,  and  the  refusal  of  the  directors  or 
majority  stockholders  to  rescind  would  not  ordinarily  constitute 
a  fraud  upon  the  minority.38  A  further  difficulty  lies  in  the  fact 
that  the  majority  stockholders  could  by  a  vote  at  a  meeting  duly 
called  bind  the  minority  by  their  election  to  retain  the  property,39 
and  a  transaction  which  is  subject  to  ratification  by  the  majority 
stockholders  cannot  be  set  aside  at  the  suit  of  the  minority.40  The 
minority  stockholders'  suit  might  well  be  maintained  if  it  were 
shown  that  the  relation  of  the  directors  to  the  transaction  was 
such  that  they  could  not  be  expected  to  exercise  a  fair  discretion 
in  regard  thereto,  and  that  some  of  the  majority  stockholders  were, 


App.  Div.  382,  412-413,  87  Supp. 
369;  MacDougall  v.  Gardiner,  L.  R. 
1  Ch.  Div.  13,  21,  and  cases  cited. 

37.  See  Brewer  v.   Boston  Thea- 
tre, 104  Mass.  378,  394}  Hutchinson 
v.  Simpson,  92  N.  Y.  App.  Div.  382, 
412-413,   87   Supp.   369,    (dissenting 
opinion  of  Hatch,  J.)  ;  cf.  Insurance 
Press  v.  Montauk  Wire  Co.,  103  N. 
Y.  App.  Div.  472,  475,  93  Supp.  134. 

38.  Krohn  v.  Williamson,  62  Fed. 
Rep.    869,    872,    affirmed,    sub    nom. 
Williamson  v.  Krohn,  66  Fed.  Rep. 
655,  13  C.  C.  A.  668,  31  U.  S.  App. 
325. 

39.  See  ante,  §  119. 

40.  Federal. — Hawes  v.   Oakland, 
104  U.  S.  450,  26  L.  Ed.  827. 

Maryland. — Urner  v.  Sollenberger, 
89  Md.  316,  333,  43  Atl.  810. 

New  Jersey. — United  States  Steel 
Corporation  v.  Hodge,  64  N.  J.  Eq. 
807,  817,  54  Atl.  1,  60  L.  R.  A.  742 ; 
Endicott  v.  Marvel,  81  N.  J.  Eq.  378, 
87  Atl.  230,  affirmed,  83  N.  J.  Eq. 
632,  92  Atl.  373. 

New    York. — Continental    Securi- 


ties Co.  v.  Belmont,  206  N.  Y.  7,  99 
N.  E.  138,  51  L.  R.  A.  N.  S.  112,  Am. 
&  Eng.  Ann.  Cas.,  1914  A.  777,  af- 
firming, 150  App.  Div.  298,  134  Supp. 
635;  Continental  Ins.  Co.  v.  N.  Y. 
&  H.  R  R.  Co.,  187  N.  Y.  225,  238, 
79  N.  E.  1026;  Burden  v.  Burden, 
159  N.  Y.  287,  306,  54  N.  E.  17 ;  Wal- 
lace v.  Long  Island  R.  R.  Co.,  12 
Hun  460;  Hart  v.  Ogdensburg  &  L. 
C.  R.  R.  Co.,  89  Hun  316,  70  St.  Rep. 
226,  35  Supp.  566;  MacNaughton  v. 
Osgood,  41  Hun  109,  (reversed,  on 
another  ground,  114  N.  Y.  574,  21 
N.  E.  1044)  ;  Hord  v.  Realty  Invest- 
ment Corporation,  N.  Y.  Law  Jour- 
nal, May  10,  1906.  Cf.  Insurance 
Press  v.  Montauk  Wire  Co.,  103  App. 
Div.  472,  475,  93  Supp.  134. 

United  Kingdom  and  Colonies. — 
Burland  v.  Earle,  1902,  App.  Cas. 
83,  93;  Bagshaw  v.  Eastern  Union 
Ry.  Co.,  7  Hare  114,  129,  (affirmed, 
2  Mac.  &  G.  389,  19  L.  J.  Ch.  N.  S. 
410),  citing  Foss  v.  Harbottle,  2 
Hare  461,  494-495,  504-506. 

The  majority  is,  in  the  absence  of 


SUITS  BY  CORPORATION.  347 

because  of  their  participation  in  the  fraud,  debarred  from  voting 
upon  the  question  of  rescission,41  and  that  the  plaintiffs  actually 
represented  a  majority  of  the  shares  entitled  to  vote.42  The  action 
might  also  be  maintained  by  showing  that  the  directors  and  stock- 
holders were  under  the  control  of  the  guilty  parties.43 

It  should  be  stated  that  if  the  situation  is  such  that  a  minority 
stockholders'  action  for  a  rescission  can  be  maintained,  the  plain- 
tiff stockholders,  not  being  in  control  of  the  corporation,  cannot, 
and  therefore  need  not  in  their  complaint  offer  to  restore  the  prop- 
erty purchased.  The  equities  of  the  parties  will  in  such  case  be 
adjusted  upon  the  trial.44 

§  188.  Minority  stockholder  intervening  to  defend  suit  against 

corporation. 

It  sometimes  happens  that  the  rights  of  the  corporation  arising 
out  of  the  frauds  of  its  promoters  are  not  asserted  before  an  action 
is  brought  against  it  upon  the  bonds,  notes,  or  other  obligations  of 
the  corporation  unlawfully  taken  by  the  promoters.45  The  mi- 
nority stockholder  may  in  such  case,  upon  the  same  principles 
which  permit  him  to  prosecute  the  company's  claims  against  the 
promoters,  intervene  in  the  suit  against  the  corporation,  if  it  ap- 
pears that  the  company  has  a  defense  to  such  suit  which  there  is 
reason  to  believe  would  otherwise  not  be  properly  asserted.46 

fraud  or  illegality,  entitled  to  con-  44.  Continental   Securities  Co.  v. 

trol  the  policy  of  the  corporation.  Belmont,  206  N.  Y.  7,  99  N.  E.  138, 

DuPuy  v.  Transportation  and  Ter-  51  L.  R.  A.  N.  S.  112,  Am.  &  Eng. 

minal  Co.,  82  Md.  408,  426,  33  Atl.  Ann.  Cas.,  1914  A.  777. 

889,  890,  34  Atl.  910.  45.  See  ante,  §  166. 

41.  For   cases    dealing    with    the  46.  Dickerman  v.  Northern  Trust 
question  as  to  when  the  promoters  Co.,  176  TT.  S.  181,  188,  20  Sup.  Ct. 
may,  and  when  they  may  not,  vote  311,  41  L.  Ed.  423;  Bronson  v.  La 
as  stockholders  on  the  matter  of  the  Crosse   &   Milwaukee   R.   R.   Co.,   2 
rescission,  see  ante,  §  119.  Wall.  283,  17  L.  Ed.  725,   (cited  in 

42.  See  Atwool  v.  Merryweather,  Heath  v.  Erie  Ry.  Co.,   8  Blatch.  347, 
L.  R.  5  Eq.  464n,  37  L.  J.  Ch.  N.  S.  11   Fed.   Cas.   976,   997)  ;    Dodge   v. 
35.  Woolsey,  18  How.  (U.  S.)  331,  15  L. 

43.  Mason  v.  Harris,  L.  R.  11  Ch.  Ed.    401 ;    Koehler    v.    Black    River 
Div.  97.  Falls  Iron  Co.,  2  Black  (U.  S.)  715; 


348  THE  LAW  OF  PROMOTERS. 

§  189.  Suits  by  creditors  of  corporation. 

A  bondholder  or  other  creditor  of  a  corporation,  will  not  ordi- 
narily be  permitted  to  prosecute  the  company's  claim  against  the 
promoters.47  The  proper  remedy  of  the  creditor  is  to  obtain  a 
judgment  against  the  corporation  and  then  proceed  by  judgment 
creditor's  action  if  he  can  make  out  a  case  for  such  relief,48  or  to 
apply  for  the  appointment  of  a  receiver  who  must,  in  a  proper  case, 
enforce  the  promoters'  liability.  If  the  receiver  fails  to  prosecute 
the  company's  claim  against  the  promoters,  the  creditor  may,  per- 
haps, bring  an  action  against  the  receiver,  the  corporation,  and  the 
guilty  promoters  to  establish  the  liability  of  the  latter.49  It  would 
generally,  however,  be  better  practice  for  the  aggrieved  creditor  to 
move  the  court  which  appointed  the  receiver,  for  an  order  direct- 
ing the  latter  to  sue  the  promoters,  or  if  there  were  reason  to  be- 
lieve that  the  suit  would  in  such  case  not  be  prosecuted  with  suffi- 
cient vigor,  to  apply  for  the  appointment  of  a  different  receiver. 

A  creditor  induced  by  the  fraud  of  the  promoters  to  purchase 
the  debentures  of,  or  lend  money  to,  the  corporation,  may  bring 
a  personal  suit  against  the  promoters  for  the  damages  suffered  by 
reason  of  their  fraud.50 

Big  Creek  Gap  Coal  &  Iron  Co.  v.          See  Cook  on  Corporations,  §  735. 
American    Loan    &   Trust   Co.,    127          49.  Land  Title  &  Trust  Co.  v.  As- 
Fed.  Rep.  625,  62  C.  C.  A.  351.  phalt  Co.  of  America,  121  Fed.  Rep. 
See  also  Cook  on  Corporations,  §  587;  Ackerman  v.  Halsey,  37  N.  J. 
848    (i)  ;   American  Digest  Century  Eq.  356,  affirmed,  *w6  nom.  Halsey 
Ed.  "  Corporations,"  §  777,  et  seq.,  v.  Ackerman,  38  N.  J.  Eq.  501. 
Decennial  Ed.,  §  202,  et  seq.  See  also  Cook  on  Corporations,  § 

47.  El  Cajon  Portland  Cement  Co.  735. 

v.  Wentz  Eng.  Co.,  165  Fed.  Rep.  See  as  to  terms,  etc.,  Gerding  v. 

619,  92  C.  C.  A.  447 ;  Arnold  v.  Sear-  East  Tennessee  Land  Co.,  185  Mass. 

ing,  73  N.  J.  Eq.  262,  269,  67  Atl.  380,  70  N.  E.  206 ;  McEwen  v.  Harri- 

831 ;  Mills  v.  Northern  Ry.  of  Buenos  man  Land  Co.,  138  Fed.  Rep.  797,  71 

Ayres  Co.,  L.  R.  5  Ch.  App.  621,  628.  C.  C.  A.  163. 

See  Cook  on  Corporations,  §  735.  50.  Dunnett  v.    Mitchell,   Session 

48.  Mills     v.     Northern    Ry.     of  Cases,  12  Rettie  400,  and  see  post, 
Buenos  Ayres  Co.,  L.  R.  5  Ch.  App.  §  205n,  also  §  254. 

621.  Jt  has  been  said  that  while  one 


SUITS  BY  CORPORATION. 


349 


§  190.  Parties  defendant. 

As  promoters  guilty  of  taking  secret  profits,  or  otherwise  de- 
frauding the  company,  are  regarded  as  joint  tort  feasors,  suit 
may  be  brought  against  any  one  or  more,  or  all  of  such  promot- 
ers.61 

Any  person  who  aids  the  promoters  in  defrauding  the  corpo- 
ration, such  as  the  vendor  of  property  sold  to  the  corporation 
who  helps  to  deceive  it  by  stating  an  exaggerated  consideration  in 
his  deed,  contract,  or  receipt,  may  be  joined  with  the  promoters 
as  a  party  defendant.52  The  agent  of  one  selling  property  to  the 


extending  credit  to  a  corporation 
may  properly  complain  of  fraudu- 
lent statements  made  in  reference 
to  the  affairs  and  conditions  of  the 
corporation  at  the  time  the  credit 
is  extended,  he  cannot  complain  of 
mismanagement  on  the  part  of  the 
officers  of  the  corporation  prior  to 
the  time  that  the  credit  was  ex- 
tended. Commercial  Bank  of  Au- 
gusta v.  Warthen,  119  Ga.  990,  47  S. 
E.  536,  citing  Thompson  on  Lia- 
bility of  Officers  and  Agents  of 
Corporations,  page  460;  quoted  in 
Joseph  Rosenheim  Shoe  Co.  v. 
Home,  10  Ga.  App.  582,  73  S.  E. 
953. 

51.  Old  Dominion  Copper,  etc., 
Co.  v.  Lewisohn,  210  U.  S.  206,  214- 
215,  28  Sup.  Ct.  634,  52  L.  Ed.  1025; 
Davis  v.  Las  Ovas  Co.,  227  U.  S.  80, 
33  Sup.  Ct  197,  57  L.  Ed.  426,  af- 
firming, Las  Ovas  Co.  v.  Davis,  35 
App.  Cas.  Dist.  of  Col.  372 ;  Bigelow 
v.  Old  Dominion  Copper,  etc.,  Co., 
225  U.  S.  Ill,  127,  132,  32  Sup.  Ct. 
641,  56  L.  Ed.  1009,  Am.  &  Eng. 
Ann.  Cas.,  1913  E.  875. 

Old  Dominion  Copper,  etc.,  Co.  v. 
Bigelow,  188  Mass.  315,  328-329,  74 


N.  E.  653,  108  Am.  St.  Rep.  479 ;  Old 
Dominion  Copper,  etc.,  Co.  v.  Bige- 
low, 203  Mass.  159,  201,  89  N.  E. 
193,  40  L.  R.  A.  N.  S.  314,  affirmed, 
225  U.  S.  Ill,  56  L.  Ed.  1009,  32 
Sup.  Ct.  641,  Am.  &  Eng.  Ann.  Cas., 
1913  E.  875. 

Arnold  v.  Searing,  73  N.  J.  Eq. 
262,  268,  67  Atl.  831;  Stockton  v. 
Anderson,  40  N.  J.  Eq.  486,  4  Atl. 
642,  and  cases  cited. 

In  re  Olympia,  Ltd.,  1898,  2  Ch. 
Div.  153,  affirmed,  sub  nom.  Gluck- 
stein  v.  Barnes,  1900,  App.  Cas. 
240. 

And  see  post,  §  303. 

52.  Lomita  Land  &  Water  Co.  v. 
Robinson,  154  Cal.  36,  45-47,  97  Pac. 
10,  18  L.  R.  A.  N.  S.  1106,  1123-1126 ; 
Stoney  Creek  Woolen  Co.  v.  Smalley, 
111  Mich.  321,  69  N.  W.  722;  Lind- 
say Petroleum  Co.  v.  Hurd,  L.  R.  5 
P.  C.  221,  230,  243-244.  See  cases 
cited  In  note  18,  L.  R.  A.  N.  S.  1119- 
1121,  and  see  post,  §  287. 

The  agent  of  the  promoters  who 
assists  them  in  the  perpetration  of 
their  fraud  is  likewise  liable.  Lid- 
ney  &  Wigpool  Iron  Ore  Co.  v.  Bird, 
L.  R.  33  Ch.  Div.  85,  95,  24  Am. 


350 


THE  LAW  OF  PROMOTERS. 


corporation  becomes  jointly  liable  with  the  promoters  if  he,  with 
knowledge  of  their  relation  to  the  corporation,  divides  with  them 
the  commissions  paid  to  him  by  his  principal.53 

It  has  been  held  that  one,  who  with  knowledge  of  the  promoters' 
unlawful  profits  aids  them  in  securing  subscribers  for  the  shares 
of  the  company,  thereby  makes  himself  jointly  liable  with  the  pro- 
moters, though  he  was  not  a  party  to  the  scheme  from  its  incep- 
tion and  did  not  receive  any  part  of  the  promoters'  profits.54 

It  may  be  broadly  stated  that  any  one  who  aids  the  promoters 
to  commit  a  fraud  upon  the  company  becomes  a  joint  tort  feasor 
and  jointly  and  severally  liable  with  them  for  all  damages  suffered 
by  the  corporation.55  In  order  that  a  third  person  may  be  held 
liable  with  the  promoters  it  must,  however,  be  shown  that  such 
third  person  acted  with  knowledge  of  the  facts  and  with  the  intent 
to  assist  the  promoters  in  the  perpetration  of  their  fraud.56 

One  who,  with  knowledge  of  the  facts,  acted  as  a  dummy  for  the 


&  Eng.  Corp.  Gas.  23;  Cullen  v. 
Thompson's  Trustees,  4  Macq.  424, 
433. 

See  post,  §  204n. 

Cf.  Hutchinson  v.  Simpson,  92  N. 
Y.  App.  Div.  382,  425,  87  Supp.  369. 

53.  Emery   v.   Parrott,  107  Mass. 
95,  and  see  Tegarden  Bros.  v.  Big 
Star  Zinc  Co.,  71  Ark.  277,  72  S.  W. 
989. 

54.  Lomit'a  Land  &  Water  Co.  v. 
Robinson,  154  Gal.  36,  44,  97  Pac. 
10,   18  L.   R.  A.   N.    S.   1106,  1127; 
Fountain      Spring      Park     Co.      v. 
Roberts,  92  Wis.  345,  66    N.  W.  399, 
53  Am.  St.  Rep.  917. 

55.  Fountain  Spring  Park  Co.  v. 
Roberts,  92  Wis.  345,  66  N.  W.  399, 
53  Am.  St.  Rep.  917. 

One  who,  after  knowledge  of  the 
secret  profit  pays  his  subscription 


to  the  guilty  promoter  instead  of  to 
the  treasurer  of  the  corporation,  is 
liable  for  the  amount  thereof.  Sec- 
ond Nat'l  Bank  v.  Greenville  Screw- 
Point  Steel  Fence  Post  Co.,  23  Ohio 
C.  C.  274,  283. 

To  the  effect  that  the  participa- 
tion must  be  established  by  proof, 
not  by  mere  suspicious  circum- 
stances, see  Second  National  Bank 
v.  Greenville  Screw-Point  Steel 
Fence  Post  Co.,  23  Ohio  C.  C.  274, 
282,  and  see  Cranston  v.  Bank  of 
State  of  Georgia,  112  Ga.  617,  37  S. 
E.  875.  See  also  post,  §  287. 

56.  Cranston  v.  Bank  of  State  of 
Georgia,  112  Ga.  617,  37  S.  E.  875; 
South  Missouri  Pine  Lumber  Co.  v. 
Crommer,  202  Mo.  504,  519,  101  S. 
W.  22,  26;  Forest  Land  Co.  v. 
Bjorkquist,  110  Wis.,  547,  86  N.  W. 
183. 


SUITS  BY  CORPORATION. 


351 


promoters,  is  at  least  a  proper  party  to  a  suit  based  upon  their 
fraud.87 

Whether  a  person  who  received  a  share  of  the  promoters'  profits 
can,  in  an  action  for  an  accounting,  be  held  liable  beyond  the 
amount  received  by  him,  is  a  question  that  is  not  free  from  doubt.58 
Such  a  person  is,  however,  always  a  proper  party  to  the  suit.59 

§  191.  Actions  against  personal  representatives  of  deceased  pro- 
moter. 

An  action  may,  even  in  those  jurisdictions  in  which  the  rule  that 
actions  ex  delictu  die  with  the  person  has  not  been  changed  by 
statute,60  be  maintained  against  the  personal  representatives  of  a 
deceased  promoter,  if  the  liability  upon  which  the  suit  is  based 
rests  upon  a  violation  of  the  promoter's  fiduciary  relation  to  the 
corporation,61  or  if  the  promoter's  estate  benefited  by  his  fraud.62 


57.  Hutchinson    v.     Simpson,    92 
N.  Y.  App.  Div.  382,  425,  87  Supp. 
369.     (Dissenting  opinion  of  Hatch, 

J.) 

58.  See  post,  §  303. 

59.  Getty  v.  Devlin,  70  N.  Y.  504, 
511 ;  Stratford  Fuel  Ice  C.  &  C.  Co. 
v.  Mooney,  21  Ont.  L.  R.  426. 

60.  See  Cyclopedia   of  Law  and 
Procedure,  Vol.  1,  p.  66.     See  also 
generally,  p.  50,  et  seq. 

61.  Warren  v.  Para  Rubber  Shoe 
Co.,   166   Mass.    97,    104,   44   N.    E. 
112;    Wineburgh    v.    United    States 
Steam,  etc.,  Co.,  173  Mass.  60,  53  N. 
E.     145,     73     Am.     St.     Rep.     261; 
Houghton  v.  Butler,  166  Mass.  547, 
44  N.   E.  624. 

Bagnall  v.  Carlton,  L.  R.  6  Ch. 
Div.  371,  388-389;  Phosphate 
Sewage  Co.  v.  Hartmont,  L.  R.  5  Ch. 
Div.  394,  441,  46  L.  J.  Ch.  661 ;  New 
Sombrero  Phosphate  Co.  v.  Er- 


langer,  L.  R.  5  Ch.  Div.  73,  117-118, 
25  W.  R.  436,  affirmed,  sub  nom. 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
6  Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65;  Concha  v.  Murri- 
etta,  L.  R.  40  Ch.  Div.  543;  Phillips 
v.  Homfray,  L.  R.  24  Ch.  Div.  439, 
456-457,  affirmed,  L.  R.  11  App. 
Cas.  466;  Morgan  v.  Ravey,  6  H.  & 
N.  265,  '276. 

As  to  the  liability  of  the  per- 
sonal representatives  of  the  pro- 
moter, in  an  action  for  damages  for 
fraud  and  deceit,  see  Peek  v.  Gur- 
ney,  L.  R.  6  H.  L.  377,  392,  et  seq.; 
Shepheard  v.  Bray,  1906,  2  Ch. 
Div.  235,  253,  75  L.  J.  Ch.  N.  S.  633, 
but  see  1907,  2  Ch.  Div.  571,  76 
L.  J.  Ch.  N.  S.  692. 

62.  Warren  v.  Para  Rubber  Co., 
166  Mass.  97,  104,  44  N.  E.  112; 
Wineburgh  v.  United  States  Steam, 


352  THE  LAW  OF  PROMOTERS. 

The  rule  that  an  action  against  the  personal  representatives  of 
one  of  two  or  more  joint  debtors  cannot  be  maintained  unless  it 
appears  that  the  survivors  are  insolvent,  does  not  prevent  the 
joinder  of  the  personal  representatives  of  a  deceased  promoter  as 
co-defendants  with  the  surviving  promoters  in  an  action  to  recover 
secret  profits,  for  this  rule  has  no  application  to  a  cause  of  action 
predicated  upon  a  wrong  or  violation  of  duty  as  agent  or  trus- 
tee.68 

The  personal  representatives  of  a  deceased  promoter  cannot, 
however,  be  joined  with  other  defendants  in  action  for  damages,  for 
fraud  and  deceit.64 

§  192.  Parties  defendant  in  minority  stockholders'  suits. 

Where  a  suit  is  brought  by  a  minority  stockholder  the  corpo- 
ration is  a  necessary  party  defendant,  as  the  judgment  sought  is 
one  in  its  favor.  If  the  corporation  were  not  a  party  the  judg- 
ment rendered  would  not  be  conclusive  upon  its  rights,  and  it  would 
be  manifestly  unfair  to  compel  the  promoters  to  litigate  the  ques- 
tion of  their  liability  to  the  corporation,  in  a  suit  which  would  not 
be  conclusive  if  decided  in  their  favor.65 

etc.,   Co.,   173   Mass.   60,    53   N.    E.  Co.   v.   Erlanger,   L.   R.   5  Ch.   Div. 

145,  73  Am.  St.  Rep.  261;  Houghton  73,  117-118,  25  W.  R.  436,  affirmed, 

v.  Butler,  166  Mass.  547,  44  N.  E.  L.  R.  3  App.  Gas.  1218,  6  Eng.  Rul. 

624 ;  Peek  v.  Gurney,  L.  R.  6  H.  L.  Cas.  777,  39  L.  T.  N.  S.  269,  27  W. 

377,  393 ;  Phillips  v.  Homf ray,  L.  R.  R.  65. 

24   Ch.    Div.   439,   457,    et   seq.,    af-  64.  Dennin    v.    Wood,    162   N.    Y. 

firmed,  L.  R.  11  App.  Cas.  466 ;  Fin-  App.  Div.  930,  147  Supp.  1107,  af- 

lay  v.  Chirney,  L.  R.  20  Q.  B.  Div.  firmed,   212   N.    Y.   602,   106  N.    E. 

494,  504.     Compare,  however,  In  re  1032. 

Duncan,  1899,  1  Ch.  Div.  387.  Cf.  Lane  v.  Fenn,  76  N.  Y.  Misc. 

63.  Hutchinson  v.  Simpson,  92  N.  48,  134  Supp.  92. 

Y.  App.  Div.  382,  426.  87  Supp.  369,  65.  Federal.— Porter      v.      Sabin, 

(dissenting  opinion   of  Hatch,   J.)  ;  149  U.  S.  473,  478,  13  Sup.  Ct.  1008, 

Tiffany    v.    Hess,    67    N.    Y.    Misc.  37  L.  Ed.  815;  Davenport  v.  Dows, 

258,  261,  22   Supp.  482;   Sortore  v.  18   Wall.   626,    (and  cases  cited   in 

Scott,    6    Lans.     (N.    Y.)     271,    276,  note  at  foot  of  p.  627),  21  L.  Ed. 

and   see  New   Sombrero   Phosphate  938. 


SUITS  BY  CORPORATION. 


353 


A  minority  stockholder  must,  if  the  corporation  is  in  the  hands 
of  a  receiver,  join  the  receiver  as  a  party  defendant.66 

§  193.  Suits  at  law  and  in  equity. 

A  suit  to  recover  the  promoters'  profits  as  distinguished  from 
an  action  for  damages  done  to  the  corporation  67  is,  if  brought  as 
an  action  for  an  accounting,  a  suit  in  equity.68  Substantially  the 
same  relief  may,  however,  often  be  had  at  law  by  means  of  an 


Maine. — Hersey  v.  Veazie,  24  Me. 
9,  41  Am.  Dec.  364. 

New  Jersey. — Groel  v.  United 
Electric  Co.  of  N.  J.,  70  N.  J.  Eq. 
616,  623,  626,  61  Atl.  1061. 

New  York. — Greaves  v.  Gouge,  69 
N.  Y.  154 ;  Brinckerhoff  v.  Bostwick, 
88  N.  Y.  52,  59;  Corning  v.  Barrett, 
22  Misc.  241,  48  Supp.  1013 ;  Robin- 
son v.  Smith,  3  Paige's  Ch.  222. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  87,  96  Pac.  528,  534, 
quoting  Pomeroy's  Equity  Juris- 
prudence, (3rd  Ed.),  Vol.  Ill,  § 
1095. 

Under  the  English  practice  the 
corporation  is  joined  as  a  party 
complainant.  If  it  objects  it  is 
eliminated  as  a  complainant,  and 
made  a  defendant.  See  Groel  v. 
United  Electric  Co.  of  N.  J.,  70  N. 
J.  Eq.  616,  626,  61  Atl.  1061, 
and  see  Mason  v.  Harris,  L.  R.  11 
Ch.  Div.  97. 

It  is  held  in  Slattery  v.  St.  Louis 
&  New  Orleans  Transportation  Co., 
(91  Mo.  217,  4  S.  W.  79,  60  Am.  Rep. 
245),  that  the  recalcitrant  directors 
must  also  be  joined  as  parties  de- 
fendant. 

66.  Porter  v.  Sabin,  149  U.  S.  473, 
478,  13  Sup.  Ct.  1008,  37  L.  Ed.  815 ; 
Ackerman  v.  Halsey,  37  N.  J.  Eq. 


356,  362,  affirmed,  *w6  nom.  Halsey 
v.  Ackerman,  38  N.  J.  Eq.  501; 
Brinckerhoff  v.  Bostwick,  88  N.  Y. 
52,  61. 

The  corporation  should,  perhaps, 
be  joined  with  the  receiver,  Brinck- 
erhoff v.  Bostwick,  88  N.  Y.  52,  61. 

67.  For    the   distinction    between 
the     recovery     of     the     promoters* 
"  profits "  and  an  action  for  "  dam- 
ages," see  ante,  §  161n. 

68.  Massachusetts. — Old     Domin- 
ion Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  329,  74  N.  E.  653,  108  Am. 
St.  Rep.  479,  citing  Hayward  v.  Lee- 
son,  176  Mass.  310,  57  N.  E.  656,  49- 
L.  R.  A.  725. 

New  York. — Getty  v.  Devlin,  70  N. 
Y.  504,  511. 

Ohio. — Second  National  Bank  v. 
Greenville  Screw-Point  Steel  Fence 
Post  Co.,  23  Ohio  C.  C.  274,  281. 

Oregon. — Johnson  v.  Sheridan 
Lumber  Co.,  51  Or.  35,  40,  93  Pac. 
470,  472. 

Pennsylvania. — McElhenny's  Ap- 
peal, 61  Pa.  188,  193. 

Wisconsin. — Hebgen  v.  Koeffler, 
97  Wis.  313,  320,  72  N.  W.  745,  747- 
748 ;  Zinc  Carbonate  Co.  v.  First  Na- 
tional Bank,  103  Wis.  125,  135,  79 
N.  W.  229,  232,  74  Am.  St.  R.  845. 


354 


THE  LAW  OF  PROMOTERS. 


action  for  money  had  and  received  to  the  company's  use.69  The 
damages  suffered  by  the '  corporation  by  reason  of  the  fraud  com- 
mitted upon  it  by  the  promoters  may  be  recovered  in  an  action  at 
law.  It  has  even  been  said  that  such  an  action  cannot  be  main- 
tained in  equity.70  Equity  jurisdiction  of  an  action  of  that  char- 
acter might,  however,  be  sustained  because  of  the  fiduciary  rela- 
tion of  the  promoter  to  the  corporation.71 

A  minority  stockholder's  suit  is,  whatever  the  nature  of  the  com- 
plaint, or  the  relief  demanded  therein,  always  an  action  in  equity.72 

§  194.  The  same  subject. — Rescission. 

The  corporation  may  either  bring  its  suit  in  equity  for  a  rescis- 


69.  Johnson  v.   Sheridan  Lumber 
Co.,  51  Or.  35,  40,  93  Pac.  470,  472, 
citing    Thompson    on    Corporations, 
(1st  ed.),  §  457;  Pietsch  v.  Milbrath, 
123   Wis.   647,   658-660,   101   N.    W. 
388,  392,  102  N.  W.  343,  68  L.  R.  A. 
945,  107  Am.  St.  Rep.  1017 ;  Limited 
Investment   Assoc.    v.   Glendale   In- 
vestment Assoc.,  99  Wis.  54,  59,  74 
N.  W.  633. 

70.  Erlanger    v.    New    Sombrero 
Phosphate   Co.,   L.   R.   3   App.   Gas. 
1218,  1278,  6  Eng.  Rul.  Gas.  777,  39 
L.  T.  N.  S.  269,  27  W.  R.  65,  affirm- 
ing, New  Sombrero  Phosphate  Co.  v. 
Erlanger,   L.   R.   5  Ch.   Div.  73,  25 
W.   R.  436,  cited  in  Hutchinson   v. 
Simpson,   92   N.    Y.    App.    Div.   382, 
400,  87  Supp.  369. 

See  ante,  §  171  note. 

71.  Maryland. — Booth    v.    Robin- 
son, 55  Md.  419,  437-438. 

Massachusetts. — 0 1  d  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  188 
Mass.  315,  329,  74  N.  E.  653,  108 
Am.  St.  Rep.  479;  same  v.  same, 
203  Mass.  159,  202,  89  N.  E.  193, 
40  L.  R,  A.  N.  S.  314;  Warren  v. 
Para  Rubber  Shoe  Co.,  166  Mass. 


97,  104,  44  N.  E.  112,  and  cases 
cited;  Peabody  v.  Flint,  88  Mass. 
52,  56. 

New  Jersey. — Citizens  Loan  As- 
sociation v.  Lyon,  29  N.  J.  Eq.  110. 

New  York. — Brinckerhoff  v.  Bost- 
wick,  99  N.  Y.  185,  193,  1  N.  E.  663, 
and  cases  cited.  Squiers  v.  Thomp- 
son, 73  App.  Div.  552,  76  Supp.  734, 
11  Ann.  Cas.  160,  affirmed  without 
opinion,  172  N.  Y.  652,  65  N.  E. 
1122. 

Rhode  Island. — Hodges  v.  New 
England  Screw  Co.,  1  R.  I.  312,  340, 
citing  authorities. 

See  ante,  §  171n,  and  post,  §  236n. 

72.  Corning  v.  Barrett,  22  N.  Y. 
Misc.  241,  48  Supp.  1013 ;  Land,  Log 
&  Lumber  Co.  v.  Mclntyre,  100  Wis. 
245,  255-256,  75  N.  W.  964,  968,  69 
Am.  St.  Rep.  915;  Jenkins  v. 
Bradley,  104  Wis.  540,  552,  80  N.  W. 
1025,  1028. 

As  to  the  statute  of  limitations 
applicable  to  such  suits,  see  People 
v.  Equitable  Life  Assurance  Society, 
124  N.  Y.  App.  Div.  714,  734,  109 
Supp.  453. 


SUITS  BY  CORPORATION. 


355 


sion,73  or  after  giving  notice  of  rescission  and  tendering  a  recon- 
veyance, maintain  its  suit  at  law  for  the  recovery  of  the  moneys 
paid  by  it.74  If  the  action  is  brought  in  equity,  a  tender  of  a  re- 
conveyance need  not,  according  to  the  weight  of  authority,  be  made 
before  the  pommencement  of  the  action.  The  complaint  in  such 
case  does  not  proceed  upon,  but  prays  for,  a  rescission  of  the  con- 
tract, and  it  is  sufficient  to  make  the  offer  of  restoration  in  the 
complaint.75  It  has  even  been  held  that  an  offer  of  restoration  in 
the  complaint  is  not  necessary,  as  a  court  of  equity  would  in  any 
event,  by  its  decree,  make  the  reconveyance  of  the  property  a  con- 
dition of  the  repayment  of  the  purchase  price.76 

§  195.  Joinder  of  actions. 

Great  latitude  in  the  joinder  of  causes  of  action  arising  out  of 


73.  Commonwealth  S.  S.  Co.  v.  Am- 
erican   Shipbuilding    Co.,    197    Fed. 
Rep.   780;   same  v.   same,   197  Fed. 
Rep.    797,    affirmed,   215   Fed.    Rep. 
296,  131  C.  C.  A.  596;  Vail  v.  Rey- 
nolds, 118  N.  Y.  297,  302,  23  N.  E. 
301 ;  Heckscher  v.  Edenborn,  203  N. 
Y.  210,  220,  96  N.  E.  441 ;  Hebgen  v. 
Koeffler,  97  Wis.  313,  320,  72  N.  W. 
745,  747;  Erlanger  v.  New  Sombrero 
Phosphate  Co.,  L.   R.   3  App.   Gas. 
1218,    1278-1279,    6   Eng.    Rul.    Gas. 
777,  39  L.  T.  N.  S.  269,  27  W.  R.  65, 
affirming,  New  Sombrero  Phosphate 
Co.  v.  Erlanger,  L.  R.  5  Ch.  Div.  73, 
25  W.  R.  436. 

74.  American    Shibuilding   Co.   v. 
Commonwealth   S.   S.  Co.,  215  Fed. 
Rep.  296,  131  C.  C.  A.  596 ;  Getty  v. 
Devlin,  54  N.  Y.  403,  415;   Vail  v. 
Reynolds,  118  N.  Y.  297,  302,  23  N. 
E.  301;  Heckscher  v.  Edenborn,  203 
N.  Y.  210,  220,  96  N.  E.  44-1 ;  Second 
National  Bank  v.  Greenville  Screw- 
Point  Steel  Fence  Post  Co.,  23  Ohio 


C.  C.  274,  281;  Limited  Investment 
Association  v.  Glendale  Investment 
Association,  99  Wis.  54,  74  N.  W. 
633. 

75.  Maine    v.    Midland    Inv.    Co., 
132  Iowa  272,  109  N.  W.  801;  Vail 
v.  Reynolds,  118  N.  Y.  297,  302,  23" 
N.  E.  301;  Heckscher  v.  Edenborn, 
203  N.   Y.   210,  220,  96  N.   E.  441; 
Clarke  v.  Mercantile  Trust  Co.,  110 
N.  Y.  App.  Div.  901,  902,  95  Supp. 
1118,  and  cases  there  cited.    Thomp- 
son v.  Hardy,  19  S.  D.  91,  102  N. 
W.  299,  and  cases  cited. 

And  see  cases  cited  24  Am.  &  Eng. 
Encyc.  of  Law,  (2nd  ed.),  621. 

See,  however,  Second  National 
Bank  v.  Greenville  Screw-Point 
Steel  Fence  Post  Co.,  23  Ohio  C.  C. 
274,  281 ;  Hebgen  v.  Koeffler,  97  Wis. 
313,  320,  72  N.  W.  745,  747-748,  and 
Franey  v.  Warner,  96  Wis.  222,  235, 
71  N.  W.  81,  85. 

76.  See  cases  cited  24  Am.  &  Eng. 
Encyc.  of  Law,  (2nd  ed.),  621-622. 


356  THE  LAW  OF  PROMOTERS. 

promoters'  frauds  has  generally  been  allowed  by  courts  of  equity. 

In  See  v.  Heppenheimer,77  the  receiver  of  an  insolvent  corpora- 
tion brought  suit  in  equity,  claiming  that  certain  bonds  and  shares 
of  the  corporation  had  been  issued  to  the  promoters  without  con- 
sideration. The  action  was  brought  to  ascertain  the  amount  of  the 
valid  bonds  and  to  reduce  the  secured  indebtedness  of  the  company 
accordingly ;  to  declare  all  those  bonds  that  were  issued  without 
consideration  void  in  the  hands  of  the  holders ;  to  ascertain  the 
amounts  actually  paid  to  the  company  for  their  shares  by  the  re- 
spective stockholders,  and  to  assess  the  amount  needed  to  pay  the 
creditors,  against  such  stockholders  as  had  not  paid  for  their 
shares  in  full.  A  demurrer  for  multifariousness  was  overruled. 

In  Shutts  v.  United  Box,  Board  &  Paper  Co.,78  the  promoters 
had  by  secret  agreements  with  certain  of  the  vendors  to  the  com- 
pany given  to  such  vendors  an  advantage  over  others.  These 
secret  agreements  were  afterwards  assumed  by  the  company.  It 
was  held  that  a  bill  joining  the  corporation,  the  promoters,  and  all 
the  favored  vendors  in  an  action  for  an  accounting  for  their  profits 
under  the  secret  agreements  was  not  multifarious. 

In  Zinc  Carbonate  Co.  v.  First  National  Bank,79  the  complaint 
alleged  that  the  defendant  promoters  had  conspired  together  to  un- 
lawfully obtain  for  themselves  large  secret  profits,  and  had,  in 
furtherance  of  their  scheme,  as  officers  of  the  fully  organized  cor- 
poration, allowed  the  defendant  bank  to  obtain  a  judgment  against 
it  upon  certain  unfounded  claims  and  to  purchase  the  corporate 
property  at  a  wholly  inadequate  price  upon  execution  sale.  The 
complaint  of  the  corporation  demanded  an  accounting  by  the  de- 
fendants, the  recovery  of  damages,  and  the  nullification  of  the 

As  to   pleading   in   minority   stock-  United  Box,  Board  &  Paper  Co.,  67 

holders'  suits,  see  ante,  §  187.  N.  J.  Eq.  225,  58  Atl.  1075. 

77.  55  N.  J.  Eq.  240,  36  Atl.  966,  78.  67  N.  J.  Eq.  225,  58  Atl.  1075. 
(affirmed,  sub  nom.  Naumberg  v.  79.  103  Wis.  125,  79  N.  W.  229, 

See,  56  N.  J.  Eq.  453,  41  Atl.  1116),  74  Am.  St.  Rep.  845. 
explained  and  followed  in  Shutts  v. 


SUITS  BY  CORPORATION.  357 

judgment  against  it.  The  court  held  that  the  complaint  did  not 
improperly  unite  causes  of  action. 

In  Barcus  v.  Gates,80  it  was  held  that  a  bill  against  the  corpo- 
ration and  its  promoters  praying  for  a  rescission  of  the  plaintiffs' 
contracts  of  subscription  and  the  recovery  of  the  moneys  paid 
thereon,  that  the  corporation  be  declared  insolvent  and  dissolved, 
and  that  a  receiver  be  appointed  and  the  property  remaining  after 
the  payment  of  its  debts  distributed,  was  not  multifarious,  as  all 
the  rights  claimed  and  the  relief  demanded  were  based  upon  the 
same  fraudulent  scheme  upon  the  part  of  the  individual  defend- 
ants. 

A  prayer  by  the  corporation  for  the  rescission  of  a  purchase 
from  the  promoters,  may  be  joined  with  a  demand  for  the  damages 
sustained  by  reason  of  such  purchase.81 

It  was  held  in  Camden  Land  Co.  v.  Lewis  82  that  a  bill  to  com- 
pel certain  defendants  to  account  for  shares  of  stock  unlawfully 
received  by  them,  to  compel  another  defendant  to  account  for  the 
proceeds  of  certain  other  shares  unlawfully  received  and  sold  by 
him,  and  to  compel  still  another  defendant  to  convey  to  the  corpo- 
ration two  certain  farms  purchased  by  him  for  it  and  paid  for 
wholly  or  partly  with  its  funds  or  with  the  proceeds  of  its  shares 
unlawfully  issued  and  sold,  was  multifarious. 

It  was  held  in  Schlesinger  v.  Fisk  83  that  an  action  against  the 
promoters  for  the  conversion  of  the  shares  and  bonds  of  the  cor- 
poration could  not  be  joined  with  an  action  against  the  directors 
based  upon  their  neglect  and  misconduct.  It  does  not  clearly  ap- 
pear whether  or  not  the  misconduct  of  the  directors  related  to  the 
transfer  of  the  shares  and  bonds  to  the  promoters.  If  it  did,  the 
directors  might  well  have  been  held  jointly  liable  with  the  pro- 

80.  89  Fed.  Rep.  783,  32  C.  C.  A.      N.  E.  653,  108  Ain.  St.  Rep.  479. 
337,  61   U.   S.   App.   596.     See  also          82.  101  Me.  78,  85-86,  63  Atl.  523, 
Ashmead  v.  Colby,  26  Conn.  287.  526. 

81.  Old  Dominion  Copper,  etc.,  Co.          83.  60  N.  Y.  Misc.  442,  113  Supp. 
v.   Bigelow,  188  Mass.  315,  330,  74      578. 


358 


THE  LAW  OF  PROMOTERS. 


moters  on  the  theory  that  they  had  assisted  the  latter  in  perpetrat- 
ing their  fraud  upon  the  company. 

Causes  of  action  arising  out  of  separate  and  distinct  frauds, 
some  committed  by  certain  defendants,  some  by  others,  cannot 
be  joined  in  the  same  complaint.84 

A  demand  personal  to  the  plaintiff,  cannot  in  general  be  joined 
with  a  demand  made  by  him  as  a  minority  stockholder  suing  on 
behalf  of  the  corporation.85  This  is  particularly  so,  if  the  per- 
sonal demand  is  one  for  a  rescission  of  the  plaintiff's  subscription, 
for  such  a  demand  is  inconsistent  with  the  assertion  of  the  plain- 
tiff's right  to  sue  as  a  minority  stockholder.86 

§  196.  Actions  against  promoters,  transitory. 

An  action  to  enforce  a  promoter's  liability  is  transitory  in  its 
nature,  and  may  be  instituted  wherever  the  defendant  can  be  served 
with  process.87  This  is  equally  so  whether  the  action  be  main- 


84.  Winsor   v.    Bailey,   55   N.    H. 
218;    Camden    Land   Co.    v.    Lewis, 
101  Me.   78,  63  Atl.  523;  Brown  v. 
Bedford  City  Land  &  Improvement 
Co.,  91  Va.  31,  20  S.  E.  968. 

See  post,  §  243. 

85.  Whitney  v.  Fairbanks,  54  Fed. 
Rep.     985;     Metcalf     v.     American 
School-Furniture  Co.,  108  Fed.  Rep. 
909,   affirmed,   113   Fed.   Rep.   1020, 
51  C.  C.  A.  599;  Pietsch  v.  Krause, 
116  Wis.  344,  93  N.  W.  9;  (explained 
in  Simon  v.  Weaver,  143  Wis.  330, 
127  N.  W.  950)  ;  Weatherbe  v.  Whit- 
ney, 30  Nova   Scotia  104;   and  see 
Ward  v.  Smith,  95  N.  Y.  App.  Div. 
432,  88  Supp.  700;   Stroud  v.  Law- 
son,   1898,    2   Q.    B.    Div.   44.      See, 
however,  some  of  the  cases  cited  in 
the  next  note. 

In  Brewster  v.  Hatch,  122  N.  Y. 
349,   350,   25   N.    E.   505,    33   N.    Y. 


St.  R.  527,  the  trial  court  required 
the  plaintiffs  to  elect  whether  they 
would  seek  to  recover  for  the  bene- 
fit of  the  corporation,  or  to  recover 
their  personal  damages. 

86.  Brown  v.  Bedford  City  Land 
&  Improvement  Co.,  91  Va.  31,  20 
S.  E.  968,  and  authorities  cited.  Day 
v.  National  Mutual  Building  &  Loan 
Assoc.,  53  W.  Va.  550,  44      S.  E.  779 
Cf.  Barcus  v.  Gates,  89  Fed.  Rep. 
783,  32  C.  C.  A.  337,  61  U.  S.  App. 
596;    Ashmead    v.   Colby,   26   Conn. 
287;  City  Bank  of  Macon  v.  Bart- 
lett,  71  Ga.  797.     See  post,  §  242. 

87.  See  Bigelow  v.  Old  Dominion 
Copper,  etc.,  Co.,  74  N.  J.  Eq.  457, 
509,    71    Atl.    153,    where    it    was 
claimed  that  the  general  rule  that 
the   plaintiff   may   choose   his   own 
forum  in  any  jurisdiction  where  the 
defendant  may  be  found,  does  not 


SUITS  BY  CORPORATION. 


359 


tained  by  the  corporation,  or  by  a  minority  stockholder  suing  in 
its  behalf.88 

§197.  Conflict  of  laws. 

It  has  been  held  that  the  law  by  which  the  validity  of  the  pro- 
moters' transaction  with  the  corporation  is  to  be  determined  is 
not  the  law  of  the  state  of  the  corporate  organization,  nor  the  law 
of  the  place  where  the  directors'  meeting  authorizing  the  trans- 
action was  held,  but  the  law  of  the  place  where  the  transaction  was 
consummated  by  the  delivery  of  the  deeds  and  the  payment  of  the 
purchase  price.89 

As  the  question  of  promoters'  liability  is  one  of  general  law,  the 
Federal  courts  declare  the  law  upon  their  own  view  and  are  not 
bound  by  the  decisions  of  the  state  courts.90 


extend  to  corporations,  and  that 
these  should  pursue  their  rights  ac- 
cording to  the  laws  of  the  state 
of  their  origin. 

It  is  held  in  Moore  v.  Silver  Val- 
ley Mining  Co.,  104  N.  C.  534,  545- 
546,  10  S.  E.  679,  683,  that  an  action 
involving  the  interpretation  of  the 
corporate  charter  and  by-laws,  the 
regularity  and  sufficiency  of  its 
proceedings,  and  the  laws  of  the 
state  of  its  domicile,  should  ordi- 
narily be  brought  in  such  state. 

88.  Gere  v.  Dorr,  114  Minn.  240, 
130  N.  W.  1022. 

89.  Old    Dominion    Copper,    etc., 
Co.  v.  Bigelow,  203  Mass.  159,  173- 
174,  (two  judges  dissenting,  see  pp. 
222,  232),  89  N.  E.  193,  40  L.  R.  A. 
N.  S.  314 ;  Bigelow  v.  Old  Dominion 
Copper,  etc.,  Co.,  74  N.  J.  Eq.  457, 
507,  71  Atl.  153. 

Insurance  Press  v.  Montauk  Wire 
Co.,  83  N.  Y.  App.  Div.  259,  82  Supp. 
104,  affirmed,  178  N.  Y.  623,  70  N. 


E.  1100,  (see  opinion  on  later  ap- 
peal, 103  N.  Y.  App.  Div.  472,  93 
Supp.  134),  is  not  to  the  contrary. 
The  court  in  that  case  held  that 
there  was  no  liability  for  unlawful 
promoters'  profits,  and  that  the 
ground  of  complaint,  if  any,  de- 
pended upon  a  violation  of  the 
statutes  of  West  Virginia  relating 
to  the  issue  of  shares  without  full 
payment. 

90.  Old  Dominion  Copper,  etc., 
Co.  v.  Lewisohn,  210  U.  S.  206,  28 
Sup.  Ct.  634,  52  L.  Ed.  1025;  same 
T.  same,  195  Fed.  Rep.  637,  affirmed, 
202  Fed.  Rep.  178,  120  C.  C.  A.  392, 
petition  for  writ  of  certiorari  de- 
nied, 229  U.  S.  613,  33  Sup.  Ct. 
772,  57  L.  Ed.  1352;  Bigelow 
v.  Old  Dominion  Copper,  etc., 
Co.,  225  U.  S.  Ill,  32  Sup.  Ct. 
641,  56  L.  Ed.  1009,  Am.  &  Eng.  Ann. 
Gas.,  1913  E.  875;  Old  Dominion 
Copper,  etc.,  Co.  v.  Bigelow,  203 
Mass.  159,  175,  89  N.  E.  193,  40 
L.  R.  A.  N.  S.  314,  and  cases  cited. 


CHAPTER  XL 

OF  THE  PROMOTER'S  LIABILITY  FOR  FALSE  REPRESENTATIONS. 

Section  198.  Introductory. 

199.  False  representations  in  prospectus. 

200.  The  same  subject. — Who  entitled  to  sue  thereon. 

201.  False  certificates. 

202.  Indirect  misrepresentations. 

203.  Liability  to  brokers. 

204.  Liability  of  promoter  for  representations  of  his  agents. 

205.  Reliance  upon  false  statements. 

206.  The  same  subject. — Agreement  not  to  rely  on  representations. 

207.  Knowledge  of  falsity  of  representations. 

208.  Intent  to  deceive. 

209.  Innocent  misrepresentation  as  ground  for  rescission. 

210.  Fraud  by  concealment. 

211.  The  same  subject. — The  English  Companies  Act. 

212.  Materiality  of  representations. 

213.  Materiality  of  concealment  of  mortgage. 

214.  Materiality  of  representations  as  to  promoter's  profits. 

215.  Materiality  of  representations  as  to  promoter's  interest. 

216.  Materiality  of  representations  as  to   identity  or  position  of 
persons  selling  property  to  corporation. 

217.  Materiality  of  representations  in  regard  to  directors. 

218.  Materiality  of  representations  in  regard  to  subscriptions. 

219.  The  same  subject. — Sham  subscriptions. 

220.  Materiality  of  representations  as  to  identity  of  subscribers. 

221.  Materiality  of  representations  as  to  price  paid  for  shares. 

222.  Materiality  of  representation  that  stock  sold  is  treasury  stock. 

223.  Misstatements  as  to  value  of  shares. 

224.  Materiality  0f  representations  as  to  legal  status  of  company 
or  shares. 

225.  Representations  as  to  future  action. 

(360) 


FALSE  REPRESENTATIONS.  361 

Section  226.  Falsity  of  representations. 

227.  Interpretation  of  prospectus. 

228.  Interpretation    of    prospectus    in    light    of    particular    com- 
plainant. 

229.  Interpretation  of  prospectus  in  light  of  its  preliminary  char- 
acter. 

230.  Interpretation  of  ambiguous  statements  in  prospectus. 

231.  Interpretation  of  particular  statements. 

232.  Secret  profits  of  promoter  as  fraud  upon  subscribers. 

233.  Secret   profits   of   promoter   as   fraud    upon   subsequent   pur- 
chasers of  shares. 

234.  Misrepresentations  giving  rise  to  action  by  corporation. 

§  198.  Introductory. 

A  source  of  even  more  frequent  litigation  than  the  taking  of  un- 
lawful promoters'  profits,  are  misrepresentations  made  by  the  pro- 
moters upon  the  sale  of  the  company's  shares.  Both  liabilities  may 
arise  out  of  the  same  or  closely  related  facts,  in  that  false  repre- 
sentations are  often  made  with  regard  to,  and  with  the  purpose  of 
concealing,  the  promoter's  profits.1  The  same  considerations  may 
determine  whether  the  statement  in  question  was  on  the  one  hand 
a  sufficient  disclosure  of  the  promoter's  profits  and  a  fair  state- 
ment of  the  facts,  or,  on  the  other,  an  insufficient  disclosure  of  the 
promoter's  profits  and  a  misleading  statement  of  the  facts.  The 
liabilities  are,  however,  quite  distinct.  The  rule  against  secret 
profits  arises  out  of  the  fiduciary  relation  of  the  promoter  to 

1.  Illustrative    cases    are,    Cortes  ing  Co.,  61  Pa.  202, 100  Am.  Dec.  628 ; 

Co.   v.   Thannhauser,   45   Fed.   Rep.  Pittsburg   Min.   Co.   v.    Spooner,   74 

730;  Ex-Mission  Land  &  Water  Co.  Wis.  307,  42  N.  W.  259,  17  Am.  St. 

r.  Flash,  97  Cal.  610,  32  Pac.  600;  Rep.  149,  24  Am.  &  Eng.  Corp.  Cas. 

Burbank  v.  Dennis,  101  Cal.  90,  35  1;    Fountain    Spring    Park    Co.    v. 

Pac.  444;  Stoney  Creek  Woolen  Co.  Roberts,  92  Wis.  345,  66  N.  W.  399, 

T.  Smalley,  111  Mich.  321,  69  N.  W.  53  Am.  St.  Rep.  917;  Gluckstein  v. 

722;    Shawnee   Commercial   &   Sav-  Barnes,  1900  App.  Cas.  240,  affirm- 

ings  Bank  Co.  v.  Miller,  24  Ohio  C.  ing,  In  re  Olympia,  Ltd.,  1898,  2  Ch. 

C.  198;  Simons  v.  Vulcan  Oil  &  Min-  Div.  153,  and  see  post,  §§  214,  232- 

233. 


362 


THE  LAW  OF  PROMOTERS. 


the  corporation,  and  a  violation  thereof  is  primarily  an  injury  to 
the  corporation.  The  promoter's  liability  for  false  representations 
is  a  liability  for  fraud  and  deceit,  and  the  injury  is  in  general  an 
injury  to  the  subscribers  in  their  individual  capacity. 

§  199.  False  representations  in  prospectus. 

The  false  representations  of  the  promoter  are  frequently  made 
in  a  prospectus  issued  to  procure  subscribers  for  the  company's 
shares.  To  hold  any  promoter  liable  for  the  statements  made  in 
such  prospectus,  it  must  be  shown  that  it  was  issued  by  him,  or 
with  his  knowledge  and  privity.2 

The  English  Companies  Act  provides  that  every  promoter  who 
is  a  party  to  the  preparation  of  the  prospectus,  or  of  the  portion 
thereof  containing  the  untrue  statement,  shall  be  liable  to  pay  com- 
pensation to  all  persons  who  subscribe  on  the  faith  thereof,  and 


2.  Wiser  v.  Lawler,  189  U.  S. 
260,  264,  et  seq.,  47  L.  Ed.  802,  23 
S.  C.  624. 

Morgan  v.  Skiddy,  62  N.  Y.  319; 
Downey  v.  Finucane,  205  N.  Y.  251, 
259,  98  N.  E.  391,  40  L.  R.  A.  N.  S. 
307,  .affirming,  146  N.  Y.  App.  Div. 
209,  130  Supp.  988;  Rives  v.  Bart- 
lett,  156  N.  Y.  App.  Div.  552,  141 
Supp.  561,  reversed  on  another 
ground,  215  N.  Y.  33,  109  N.  E.  83. 

Simons  v.  Vulcan  Oil  &  Mining 
Co.,  61  Pa.  202,  218-219,  100  Am. 
Dec.  628. 

Peek  v.  Gurney,  L.  R.  6  H.  L.  377, 
392;  Bellairs  v.  Tucker,  L.  R.  13 
Q.  B.  D.  562,  571-572;  Smith  v. 
Chadwick,  L.  R.  20  Ch.  Div.  27,  70- 
71,  46  L.  T.  N.  S.  702,  affirmed,  L. 
R.  9  App.  Gas.  187,  5  Am.  &  Eng. 
Corp.  Cas.  23 ;  In  re  Leeds  &  Hanley 
Theatres  of  Varieties,  1902,  2  Ch. 
Div.  809,  823-824,  832;  Peek  v. 


Derry,  L.  R.  37  Ch.  Div.  541,  568- 
569,  579,  586,  reversed  on  another 
point,  sub  nom.  Derry  v.  Peek,  L.  R. 
14  App.  Cas.  337;  Angus  v.  Clifford, 
1891,  2  Ch.  Div.  449 ;  Clarke  v.  Dick- 
son,  6  C.  B.  N.  S.  453;  Knox  v. 
Hayman,  67  L.  T.  N.  S.  137 ;  Glasier 
v.  Rolls,  L.  R.  42  Ch.  Div.  436 ;  Ship 
v.  Crosskill,  L.  R.  10  Eq.  73. 

It  is  said  in  Rives  v.  Bartlett, 
156  N.  Y.  App.  Div.  552,  557-558, 
141  Supp.  561,  (reversed,  215  N.  Y. 
33,  109  N.  E.  83),  that  "directors, 
who  organize  a  corporation  *  *  * 
knowing  that  attempts  are  being 
made  to  induce  the  public  to  sub- 
scribe to  the  corporation  or  to  pur- 
chase its  securities,  have  imposed 
upon  them  a  duty  that  is  not  dis- 
charged by  wilfully  shutting  their 
eyes  to  the  acts  of  other  officers 
or  agents  of  the  company  as  to 
methods  used  to  procure  money  from 
the  public." 


FALSE  REPRESENTATIONS.  363 

that  every  director  shall  be  responsible  for  the  prospectus  unless 
he  proves  that  it  was  issued  without  his  knowledge  or  consent,  and 
that  on  becoming  aware  of  its  issue  he  forthwith  gave  reasonable 
public  notice  that  it  was  issued  without  his  knowledge  or  consent.5 

§  200.  The  same  subject. — Who  entitled  to  sue  thereon. 

A  subscriber  suing  because  of  a  misrepresentation  contained  in  a 
prospectus,  need  not  show  that  the  prospectus  was  intended  to  de- 
ceive him  personally.  If  he  made  his  subscription  in  reliance  upon 
the  prospectus,  he  has  a  right  of  action  against  such  persons,  as 
with  knowledge  of  its  falsity  and  with  intent  to  deceive,  put  the 
prospectus  in  circulation.  The  representations  are  deemed  made 
to  every  person  within  the  class  intended  to  be  influenced  thereby, 
and  no  relation  or  privity  between  the  parties  need  be  shown  other 
than  that  created  by  the  wrongful  and  fraudulent  act  of  issuing 
or  circulating  the  false  prospectus.4 

The  right  to  maintain  an  action  because  of  misrepresentations 
in  a  prospectus,  is  ordinarily  confined  to  the  subscribers  for  the 

3.  English  Companies  Act  of  1908,  App.    Div.    914,    112    Supp.    1131 ; 
(Stat.  8  Edw.  VII.,  Ch.  69),  §  84,  Eaton,    Cole    &    Burnham    Co.    v. 
taken  from  Directors  Liability  Act  Avery,  83  N.  Y.  31,  33-34,  38  Am.  St. 
of  1890,  (Stat.  53  and  54  Viet.,  Ch.  Rep.  389,  and  cases  cited;  Lehman- 
64).     See  also  Chapter  216,  Ontario  Charley  v.  Bartlett,  135  N.  Y.  App. 
Revised    Statutes    of   1897;    Drinc-  Div.    674,    683-684,   120    Supp.   501, 
qbier  v.  Wood,  1899,  1  Ch.  Div.  393 ;  affirmed,   202  N.   Y.   524,   95   N.   E. 
Hoole   v.    Speak,   1904,   2   Ch.   Div.  1125;   Cox  v.  National  Coal  &  Oil 
732.  Investment  Co.,  61  W.  Va.  291,  307- 

4.  Morgan    v.    Skiddy,    62    N.    Y.  308,  56  S.  E.  494,  501. 

319,  325-326;  Newbery  v.  Garland,  Clarke  v.  Dickson,  6  C.  B.  N.  S. 

31    Barb.     (N.    Y.)     121,    129-131;  453;  Scott  v.  Dixon,  29  L.  J.  Exch. 

Cazeaux  v.  Mali,  25  Barb.   (N.  Y.)  N.  S.  62;  Peek  v.  Gurney,  L.  R.  6 

578,  583 ;  Cross  v.  Sackett,  2  Bosw.  H.  L.  377,  397 ;  Davidson  v.  Tulloch, 

(N.  Y.)  617,  6  Abb.  Pr.  247,  16  How.  3  Macq.  783,  791,  2  L.  T.  N.  S.  97; 

Pr.    62;    Fenn    v.    Curtis,    23    Hun  Jury   v.    Stoker,    L.    R,    9    Ir.    385, 

(N.   Y.)    384,  390;   Greene  v.   Mer-  397,  et  seq.;  Gerhard  v.  Bates,  2  E. 

cantile  Trust  Co.,  60  N.  Y.  Misc.  189,  &  B.  476. 

Ill  Supp.  802,  affirmed,  128  N.   Y.  See  cases   cited,   14   Am.   &   Eng. 

Encyc.,  (2nd  ed.),  151. 


364 


THE  LAW  OF  PROMOTERS. 


company's  shares  and  does  not  in  general  extend  to  those  who 
subsequently  purchase  shares  in  the  open  market.  The  office  of 
the  prospectus  is  to  obtain  subscribers  and  not  to  effect  a  subse- 
quent resale  of  the  shares.  Those  who,  relying  upon  statements 
made  in  the  prospectus,  purchase  shares  otherwise  than  by  original 
subscription  are  not  within  the  class  intended  to  be  influenced 
thereby  and  cannot  maintain  an  action  thereon.5 

If,  however,  it  can  be  shown  that  a  prospectus  was  issued,  not 
merely  for  the  purpose  of  inducing  the  readers  to  take  shares  from 
the  company  by  subscription,  but  for  the  further  purpose  of  in- 
ducing the  purchase  of  shares  in  the  open  market,  the  parties  re- 
sponsible for  the  publication  of  the  prospectus  may  be  held  liable 
in  damages  to  all  who  purchased  shares  in  reliance  thereon.6 

It  has  been  held  that  a  prospectus  purporting  on  its  face  to  be 
a  mere  invitation  to  the  public  to  subscribe  for  the  bonds  of  the 
corporation,  may  be  made  the  basis  of  an  action  by  one  who  was 
induced  to  purchase  shares  if  it  can  be  shown  that  the  prospectus 
was  in  fact  circulated  for  the  purpose  of  creating  a  demand  for 
the  shares.7 


5.  Cheney  v.  Dickinson,  172  Fed. 
Rep.  109,  96  C.  C.  A.  314,  28  L.  R.  A. 
N.  S.  359,  and  cases  cited;  Hindman 
v.    First   Natl.    Bk.,   112   Fed.    Rep. 
931,  50  C.  C.  A.  623,  57  L.  R.  A.  108 ; 
Greene  v.  Mercantile  Trust  Co.,  60 
N.  Y.  Misc.  189,  111  Supp.  802,  and 
cases  cited,  affirmed,  128  N.  Y.  App. 
Div.  914,  112   Supp.  1131;   Peek  v. 
Gurney,  L.  R.  6  H.  L.  377.     (Dis- 
tinguished in  Andrews  v.  Mockford, 
1896,  1  Q.  B.  D.  372,  383) ;  Ex  parte 
Worth,  4  Drewry  529. 

Cf.  Mabey  v.  Adams,  3  Bosw. 
(N.  Y.)  346,  353,  and  see  Hindman 
v.  First  Natl.  Bk.,  98  Fed.  Rep.  562, 
569,  39  C.  C.  A.  1,  48  L.  R.  A.  210. 

6.  Hindman    v.    First   Natl.    Bk., 


112  Fed.  Rep.  931,  50  C.  C.  A.  623, 
57  L.  R.  A.  108;  Greene  v.  Mer- 
cantile Trust  Co.,  60  N.  Y.  Misc.  189, 
111  Supp.  802,  affirmed,  128  N.  Y. 
App.  Div.  914,  112  Supp.  1131; 
Reusens  v.  Gerard,  160  N.  Y.  App. 
Div.  625,  146  Supp.  86;  Cross  v. 
Sackett,  2  Bosw.  (N.  Y.)  617,  649, 
6  Abb.  Pr.  247,  16  How.  Pr.  62; 
Cazeaux  v.  Mali,  25  Barb.  (N.  Y.) 
578;  Andrews  v.  Mockford,  1896,  1 
Q.  B.  D.  372,  (distinguishing  Peek 
v.  Gurney,  L.  R.  6  H.  L.  377)  ;  Scott 
v.  Dixon,  29  L.  J.  Exch.  N.  S.  62. 

7.  Greene  v.  Mercantile  Trust  Co., 
60  N.  Y.  Misc.  189,  111  Supp.  802, 
affirmed,  128  N.  Y.  App.  Div.  914, 
112  Supp.  1131. 


FALSE  REPRESENTATIONS. 


365 


§  201.  False  certificates. 

It  has  been  held  that  a  misstatement  in  a  certificate  required  by 
law  to  be  filed  as  a  prerequisite  to  legal  incorporation,  or  as  a 
condition  of  doing  business  in  a  particular  state,  does  not  render 
the  parties  responsible  for  the  certificate  liable  to  those  who  pur- 
chase the  company's  bonds  or  shares  on  the  faith  thereof.8  There 
are,  however,  dicta  to  the  contrary.9  The  promoters  are  certainly 
liable  to  any  persons  whom  they  refer  to  such  certificate  for  infor- 
mation as  to  the  matters  therein  set  forth,  and  to  all  persons  in- 
tended to  be  influenced  by  the  certificate.10 


Where  the  plaintiff,  influenced  by 
an  alleged  false  prospectus  issued 
to  sell  the  securities  of  the  so  called 
"  Shipbuilding  Trust,"  purchased 
shares  of  the  Trust  Company  of  the 
Republic  which  was  to  act  as  the 
bank  of  deposit  of  the  "  Shipbuild- 
ing Trust "  and  represent  it  in  other 
matters  under  a  contract  which 
would  yield  the  trust  company  a 
profit  of  $1,500,000,  the  court  held 
that  the  plaintiff  had  no  right  of 
action  against  the  authors  of  the 
prospectus.  Dresser  v.  Mercantile 
Trust  Co.,  124  N.  Y.  App.  Div.  891, 
108  Supp.  577. 

a  Hindman  v.  First  Natl.  Bank, 
112  Fed.  Rep.  931,  941,  et  seq.,  50  C. 
C.  A.  623,  57  L.  R.  A.  108;  Hunnewell 
v.  Duxbury,  154  Mass.  286,  28  N.  E. 
267,  13  L.  R.  A.  733,  and  cases  cited ; 
McKee  v.  Rudd,  222  Mo.  344,  364, 
121  S.  W.  312,  318,  133  Am.  St.  Rep. 
529;  Webb  v.  Rockefeller,  195  Mo. 
57^  93  S.  W.  772,  6  L.  R.  A.  N.  S. 
872,  and  cases  cited. 

As  to  bank  statements,  see  Gerner 
v.  Mosher,  58  Neb.  135,  78  N.  W. 
384,  46  L.  R.  A.  244 ;  Morse  v.  Swits, 
19  How.  Pr.  (N.  Y.)  275. 


9.  Haines    v.    Franklin,    87    Fed. 
Rep.  139 ;  Burns  v.  Beck,  83  Ga.  471, 
10  S.  E.  121;  McBryan  v.  Universal 
Elevator  Co.,  130  Mich.  Ill,  97  Am. 
St.  Rep.  453,  89  N.  W.  683;  Coch- 
ran  v.  Arnold,  58  Pa.  399,  407 ;  Pat- 
terson v.  Franklin,  176  Pa.  612,  35 
Atl.  205,  and  see  note  to  Webb  v. 
Rockefeller,   6  L.  R.   A.  N.   S.   872. 

In  Patterson  v.  Franklin,  176  Pa. 
612,  35  Atl.  205,  the  promoters  had, 
in  order  to  consummate  the  organi- 
zation of  the  corporation,  falsely 
certified  that  10  per  cent,  of  the  capi- 
tal stock  had  been  paid  in  cash. 
The  corporation  became  insolvent 
and  the  assignee  brought  suit 
against  the  promoters.  The  court 
held  that  they  were  not  liable  to  the 
corporation,  as  it  was  benefited, 
rather  than  damaged,  by  the  making 
of  the  false  certificate. 

10.  Hindman  v.  First  Natl.  Bank, 
112  Fed.  Rep.  931,  941,  et  *eq.,  50  C. 
C.  A.  623,  57  L.  R.  A.  108 ;  Hindman 
v.   First  Natl.   Bank,  98  Fed.   Rep. 
562,  569,  39  C.  C.  A.  1,  48  L.  R.  A. 
210;    Hunnewell    v.    Duxbury,    157 
Mass.  1,  31  N.  E.  700.     And  see  § 
200. 


366  THE  LAW  OF  PROMOTERS. 

In  Bedford  v.  Bagshaw,11  the  promoters  had,  for  the  purpose  of 
listing  the  shares  of  their  company  on  the  stock  exchange",  falsely 
certified  that  two-thirds  of  the  scrip  had  been  paid  upon,  and  the 
plaintiff,  knowing  that  the  rules  of  the  stock  exchange  required 
such  certificate,  and  relying  upon  the  fact  that  the  shares  had  been 
listed,  purchased  them  upon  the  assumption  that  two-thirds  of  the 
scrip  must  have  been  paid  upon.  The  court  held  the  defendants 
liable  to  the  plaintiff  for  false  representations,  but  the  decision  was 
subsequently  overruled.12 

An  action  for  fraud  and  deceit  might  well  be  based  upon  a  false 
statement  in  a  certificate  filed  with  the  stock  exchange,  if  it  could 
be  shown  that  the  purpose  of  listing  the  shares  was  to  create  the 
impression  that  the  requirements  of  the  stock  exchange  had  been 
complied  with,  and  to  induce  the  purchase  of  shares  upon  that  as- 
sumption.13 

§  202.  Indirect  misrepresentations. 

If  the  complainant  is  a  member  of  the  class  intended  to  be  in- 
fluenced by  a  false  statement,  the  manner  of  the  publication  thereof 
is  not  material.  It  is  not  necessary  that  the  representation  com- 
plained of  be  made  to  the  plaintiff  directly.  If  the  promoters 
misrepresent  the  facts  intending  their  misrepresentations  to  be 
circulated  and  thus  to  induce  subscriptions  for  the  company's 
shares,  they  become  liable  to  all  persons  who  are,  by  the  circulation 
of  their  false  statements,  induced  to  subscribe.14 

11.  29  L.  J.  Exch.  N.  S.  59,  4  H.  sota   Title   Ins.    &    Trust   Co.,    159 
&   N.   538.  Mass.  437,  442,  34  N.  E.  625. 

12.  Peek  v.  Gurney,  L.  R.  6  H.  Minnesota. — Chubbuck    v.    Cleve- 
L.  377,  396-397.  land,  37  Minn.  466,  35  N.   W.  362, 

13.  Queen    v.    Aspinall,    L.    R.    2  5  Am.  St.  Rep.  864. 

Q.  B.  D.  48,  where  a  conviction  for  Missouri. — Watson  v.  Crandall,  7 

criminal  conspiracy  was  sustained.  Mo.  App.  233,  affirmed,  78  Mo.  583; 

14.  Iowa. — Hunter  v.  French  Lea-  Whiting  v.  Crandall,  78  Mo.  593. 
gue  Safety  Cure  Co.,  96  Iowa  573,  65  New    York. — Eaton,    etc.,    Co.    v. 
N.  W.  828.  Avery,  83  N.  Y.  31,  38  Am.  St.  Rep. 

Massachusetts. — Nash    v.    Minne-      389;    Cazeaux    v.    Mali,    25    Barb. 

(N.  Y.)   578,  583. 


FALSE  REPRESENTATIONS.  357 

§  203.  Liability  to  brokers. 

In  Pollak  v.  Dodge  Manufacturing  Co.,15  the  plaintiff  alleged 
that  he  was  by  the  false  representations  of  the  defendant,  made  to 
the  public  generally  "  in  order  to  attract  investors  and  to  induce 
persons  to  become  interested  in  the  sale  of  the  stock,"  induced  to 
undertake  the  sale  of  the  defendant's  stock  and  to  devote  a  large 
part  of  his  time  and  energy  to  that  end,  and  had  "  practically  " 
succeeded  in  effecting  the  sale  of  a  large  amount  of  stock,  and  that 
he  was  by  reason  of  the  falsity  of  such  representations  prevented 
from  selling  such  stock.  A  demurrer  to  the  complaint  was  sus- 
tained on  the  ground  that  it  was  not  alleged  that  the  represent- 
ations were  made  to  induce  brokers  or  others  to  sell  the  shares ; 
that  is  that  the  complaint  did  not  show  that  the  plaintiff  was  one 
of  the  class  whom  the  representations  complained  of  were  intended 
to  deceive.  If  the  plaintiff  had  shown  an  express  employment  to 
sell  the  shares  he  might  have  sued  on  the  contract,  on  the  theory 
that  the  defendant  had  prevented  performance.16  Had  the  plain- 
tiff brought  himself  within  the  class  intended  to  be  influenced  by 
the  misrepresentations  of  the  defendant,  his  action  would  have 
been  properly  brought  for  fraud  and  deceit.17 

§  204.  Liability  of  promoter  for  representations  of  his  agents. 

The  promoter  is  obviously  liable  for  any  misrepresentations 
made  by  his  agents  pursuant  to  his  direction  or  suggestion. 

See  note  to  Cottrill  v.  Krum,  18  scription  if  made  in  reliance  upon 

Am.  St.  Rep.  549,  562.  misrepresentations   made   to   others 

And  see  ante,  §  200.  In  his  presence.     Southern  States  F. 

The  promoter   would  presumably  &  C.  Ins.  Co.  v.  Cromartie,  181  Ala. 

not   be  liable  to   those  who  acted  295,  61  So.  907. 

upon  a  repetition  of  his  representa-  15.  78  N.  Y.  Misc.  350,  138  Supp. 

tions  if  he  actually  did  not  intend  429.    . 

his  representations  to   be  repeated.  16.  Locke    v.    Wilson,    135    Mich. 

See  note  to  Wells  v.  Cook,  88  Am.  593,  98  N.  W.  400,  10  Det.  Leg.  News 

Dec.  436,  442.    See  also  ante,  §  200.  900. 

A  subscriber  may  rescind  his  sub-  17.  Lenkeit  v.  Mitchell,  55  N.  Y. 

Misc.  395,  106  Supp.  549. 


368 


THE  LAW  OF  PROMOTERS. 


If  the  promoter  misrepresents  or  conceals  the  facts  from  his 
agent  and  the  agent  procures  subscriptions  by  a  repetition 
thereof,  the  promoter  is  responsible,  and  liable  in  damages  if  the 
other  necessary  elements  of  fraud  exist.18 

A  question  less  free  from  doubt  arises,  when  the  agent  of  the 
promoter  procures  subscriptions  by  means  of  false  and  fraudulent 
representations  made  without  the  knowledge  or  authority  of  his 
principal.  The  principal  is,  by  the  weight  of  authority,  re- 
sponsible for  the  false  representations  of  his  agent,«  though  the 
representations  be  made  without  the  knowledge  or  connivance 
and  even  contrary  to  the  express  instructions  of  the  principal.19 

If  the  agent  by  whom  the  misrepresentations  are  made,  is  the 
agent,  not  of  the  promoters,  but  of  the  company,  the  promoters 
are  not  liable  for  his  acts  though  they  as  directors  appointed  him, 
unless  it  can  be  shown  that  the  misrepresentations  were  made  pur- 


18.  Walker     v.     Anglo-American 
Mortgage  &  Trust  Co.,  72  Hun   (N. 
Y.)  334,  341,  55  St.  Rep.  54,  25  Supp. 
432,  and  see  National  Exchange  Co. 
v.  Drew,  32  Eng.  Law  &  Eq.  1,  14, 
et  seq.    And  see  ante,  §  202. 

19.  Federal. — Alger   v.   Anderson, 
78  Fed.  Rep.  729,  735-736,  and  cases 
cited. 

Missouri. — Hornblower  v.  Cran- 
dall,  7  Mo.  App.  220,  affirmed,  78 
Mo.  581. 

New  Yorfc. — Downey  v.  Finucane, 
205  N.  Y.  251,  259,  98  N.  E.  391,  40 
L.  R.  A.  N.  S.  307 ;  Miller  v.  Barber, 
66  N.  Y.  558,  567;  Getty  v.  Devlin, 
54  N.  Y.  403,  414;  Sandford  v. 
Handy,  23  Wend.  260. 

Wisconsin. — Hoyer  v.  Ludingtoto, 
100  Wis.  441,  445,  76  N.  W.  348,  and 
cases  cited;  Godfrey  v.  Schneck,  105 
Wis.  568,  571,  81  N.  W.  656;  Law  v. 
Grant,  37  Wis.  548. 


United  Kingdom  and  Colonies. — 
Houldsworth  v.  City  of  Glasgow 
Bank,  L.  R.  5  App.  Cas.  317,  326, 
338-339 ;  Wilson  v.  Hotchkiss,  2  Ont. 
L.  R.  261,  271,  and  cases  cited,  af- 
firmed, sub  nom.  Mil  burn  v.  Wilson, 
31  Can.  S.  C.  481.  See  review  of 
cases  in  Lloyd  v.  Grace,  Smith  & 
Co.,  1912,  App.  Cas.  716. 

See  Clark  &  Skyles  on  Agency,  §§ 
507-510,  Mechem  on  Agency,  (2nd 
ed.%),  §  1984,  et  seq.;  Tiffany  on 
Agency,  §§  64-66.  See  also  cases 
cited  in  succeeding  note. 

The  agent  is  himself  personally 
responsible.  Clark  &  Skyles  on 
Agency,  §  597,  Mechem  on  Agency, 
(2nd  ed.),  §  1458;  Tiffany  on 
Agency,  §  96,  and  see  ante,  §  190, 
note. 

Unless  he  makes  the  representa- 
tions without  knowledge  of  their 
falsity.  Maine  v.  Midland  Inv.  Co.,. 
132  Iowa  272,  280,  109  N.  W.  801. 


FALSE  REPRESENTATIONS. 


369 


suant  to  the  directions  of  the  promoters,  or  that  the  agent,  while 
apparently  the  agent  of  the  company,  was  actually  appointed  to 
further  the  interests  of  the  promoters,  and  that  the  latter  were 
the  actual  principals  in  respect  to  the  particular  matter  com- 
plained of.20 

§  205.  Reliance  upon  false  statements. 

A  subscriber  must,  in  order  to  base  an  action  upon  the  misrepre- 
sentations of  the  promoters,  prove  that  he  relied  upon  the  truth 
of  their  statements  and  that  his  subscription  was,  to  some  extent 
at  least,  induced  thereby.21  If  the  subscription  was  entered  in 


20.  Downey  v.   Finucane,  205  N. 
Y.  251,  259-260,  98  N.  E.  391,  40  L. 
R.  A.  N.  S.  307 ;  Arthur  v.  Griswold, 
55  N.  Y.  400;  Lane  v.  Fenn,  146  N. 
Y.  App.  Div.  205,  130  Supp.  995,  af- 
firming,   65    N.    Y.    Misc.    336,    120 
Supp.   237;   Weir   v.   Bell,   L.   R.   3 
Exch.   Div.   238;   Cargill  v.   Bower, 
L.  R.  10  Ch.  Div.  502,  513,  et  seq.; 
Weir  v.  Barnett,  L.  R.  3  Exch.  Div. 
32,  39-41 ;  Bear  v.  Stevenson,  30  L. 
T.  N.  S.  177. 

Cf.  Western  Bank  of  Scotland  v. 
Addie,  L.  R.  1  Sc.  &  Div.  App.  Gas. 
145,  also  Wilson  v.  Hotchkiss,  2 
Ont.  L.  R.  261,  271,  277,  (affirmed, 
aub  now.  Milburn  v.  Wilson,  31  Can. 
S.  C.  481),  where  the  agents  were 
appointed  by  the  promoters  before 
the  company  had  come  into  ex- 
istence; also  Rives  v.  Bartlett,  156 
N.  Y.  App.  Div.  552,  141  Supp.  561, 
reversed  on  another  ground,  215 
N.  Y.  33,  109  N.  E.  83. 

21.  Federal. — Hindman    v.    First 
Natl.  Bk.,  112  Fed.  Rep.  931,  945,  50 
C.  C.  A.  623,  57  L.  R.  A.  108. 

Georgia. — Weems  v.  Georgia  M.  & 


G.  R.  R.  Co.,  88  Ga.  303,  14  S.  E. 
583. 

Mississippi. — Selma  M.  &  M.  R.  R. 
Co.  v.  Anderson,  51  Miss.  829. 

Missouri. — Champion  Funding  & 
Foundry  Co.  v.  Heskett,  125  Mo. 
App.  516,  102  S.  W.  1050. 

New  York. — Morgan  v.  Skiddy,  62 
N.  Y.  319,  328 ;  Wakeman  v.  Dalley, 
51  N.  Y.  27,  30,  10  Am.  Rep.  551; 
Brackett  v.  Griswold,  112  N.  Y.  454, 
20  N.  E.  376,  128  N.  Y.  644,  28  N.  E, 
365. 

Pennsylvania. — McAleer  v.  Mc- 
Murray,  6  Phila.  244 ;  Economy 
Powder  Co.  v.  Boyer,  2  Berks.  131. 

United  Kingdom  and  Colonies. — 
Bellairs  v.  Tucker,  L.  R.  13  Q.  B. 
D.  562,  578;  Smith  v.  Chadwick,  L. 
R.  20  Ch.  Div.  27,  44-45,  68,  80,  46 
L.  T.  N.  S.  702,  affirmed,  L.  R.  9  App. 
Gas.  187,  190,  5  Am.  &  Eng.  Corp. 
Gas.  23;  Derry  v.  Peek,  L.  R.  14 
App.  Gas.  337,  344;  Hallows  v.  Fer- 
nie,  L.  R.  3  Ch.  App.  467,  476;  Jen- 
nings v.  Broughton,  17  Beav.  234, 
affirmed,  5  DeG.  M.  &  G.  126. 


370 


THE  LAW  OF  PROMOTERS. 


reliance  upon  the  misstatement  of  the  promoters,  it  is  immaterial 
that  the  subscriber  was  also  influenced  by  other  circumstances. 
It  is  sufficient,  to  give  rise  to  an  action,  that  the  false  statement 
was  one,  though  not  the  sole,  inducement  to  the  making  of  the 
subscription.22 

It  is  not  necessary  that  the  subscriber  point  out  the  precise 
statements  in  the  prospectus  which  induced  him  to  subscribe  for 
shares.  "  It  is  an  old  expedient,  and  seldom  successful,"  said 
Halsbury,  L.  C.,  in  Arnison  v.  Smith,23  "  to  cross-examine  a  per- 
son who  has  read  a  prospectus,  and  ask  him  as  to  each  particular 
statement  what  influence  it  had  on  his  mind,  and  how  far  it  deter- 
mined him  to  enter  into  the  contract.  This  is  quite  fallacious,  it 
assumes  that  a  person  who  reads  a  prospectus  and  determines  to 
take  shares  on  the  faith  of  it  can  appropriate  among  the  different 


Note  to  Cottrill  v.  Krum,  18  Am. 
St.  Rep.  549,  561,  and  see  note  to 
Tear  v.  Bartlett,  33  L.  R.  A.  721, 
730. 

The  same  rule  applies  to  a  credi- 
tor claiming  damages  for  fraudulent 
representations.  Priest  v.  White, 
89  Mo.  609,  1  S.  W.  361. 

22.  Federal. — Hindman  v.  First 
Natl.  Bk.,  112  Fed.  Rep.  931,  945, 
50  C.  C.  A.  623,  57  L.  R.  A.  108. 

Connecticut. — Scholfield  Gear  & 
Pulley  Co.  v.  Scholfield,  71  Conn.  1, 
17,  40  Atl.  1046. 

Missouri. — Hornblower  v.  Cran- 
dall,  7  Mo.  App.  220,  232,  affirmed, 
78  Mo.  581. 

New  York. — Morgan  v.  Skiddy,  62 
N.  Y.  319,  328. 

United  Kingdom  and  Colonies. — 
Clarke  v.  Dickson,  6  C.  B.  N.  S. 
453;  Peek  v.  Derry,  L.  R.  37  Ch. 
Div.  541,  574,  584,  588,  reversed  on 
another  point,  sub  now.  Derry  v. 


Peek,  L.  R.  14  App.  Cas.  337;  Lind- 
say Petroleum  Co.  v.  Hurd,  L.  R. 
5  P.  C.  221;  In  re  London  &  Leeds 
Bank,  56  L.  J.  Ch.  N.  S.  321,  56  L.  T. 
N.  S.  115,  35  W.  R.  344;  Arnison  v. 
Smith,  L.  R.  41  Ch.  Div.  348,  359- 
360 ;  Moore  v.  Burke,  4  F.  &  F.  258, 
288;  Knox  v.  Hayman,  67  L.  T.  N. 
S.  137;  Western  Bank  of  Scotland 
v.  Addie,  L.  R.  1  Sc.  &  Div.  App.  Cas. 
145,  158,  (citing  Nicol's  Case,  3 
DeG.  &  J.  387,  420). 

See  note  to  Cottrill  v.  Krum,  18 
Am.  St.  Rep.  549,  559,  and  note  to 
Fear  v.  Bartlett,  33  L.  R.  A.  721, 
732. 

23.  L.  R.  41  Ch.  Div.  348,  369. 
See  also  Aaron's  Reefs  v.  Twiss, 
1896,  App.  Cas.  273,  280 ;  Drincqbier 
v.  Wood,  1899,  1  Ch.  Div.  393,  404; 
Calthorpe  v.  Trechmann,  1906,  App. 
Cas.  24,  75  L.  J.  Ch.  N.  S.  90,  94 
L.  T.  N.  S.  68,  22  Times  Law 
Rep.  149.  Cf.  Hallows  v.  Fernie, 


FALSE  REPRESENTATIONS. 


371 


parts  of  it  the  effect  produced  by  the  whole.  This  can  rarely  be 
done  even  at  the  time,  and  for  a  shareholder  thus  to  analyze  his 
mental  impressions  after  an  interval  of  several  years,  so  as  to 
say  which  representation  in  particular  induced  him  to  take  shares 
is  a  thing  all  but  impossible.  A  person  reading  the  prospectus 
looks  at  it  as  a  whole,  he  thinks  the  undertaking  is  a  fine  com- 
mercial speculation,  he  sees  good  names  attached  to  it,  he  observes 
other  points  which  he  thinks  favorable,  and  on  the  whole  he  forms 
his  conclusion.  You  cannot  weigh  the  elements  by  ounces.  It  was 
said,  and  I  think  justly,  by  Sir  G.  Jessel  in  Smith  v.  Chadwick,24 
that  if  the  Court  sees  on  the  face  of  the  statement  that  it  is  of 
such  a  nature  as  would  induce  a  person  to  enter  into  the  contract, 
or  would  tend  to  induce  him  to  do  so,  or  that  it  would  be  a  part 
of  the  inducement  to  enter  into  the  contract,  the  inference  is,  if  he 
entered  into  the  contract,  that  he  acted  on  the  inducement  so  held 
out,  unless  it  is  shewn  that  he  knew  the  facts,  or  that  he  avowedly 
did  not  rely  on  the  statement  whether  he  knew  the  facts  or  not." 

An  action  cannot  be  based  upon  a  false  statement  in,  or  an 
omission  from,  a  part  of  the  prospectus  which  the  plaintiff  did  not 
read,25  nor  in  general  upon  a  prospectus  which  was  not  received 
by  the  plaintiff  until  after  he  had  applied  for  his  shares.26  An 
action  may  be  based  upon  a  misrepresentation  made  after  the 
plaintiff  had  applied  for  shares,  if  he  was  by  the  misrepresentation 


L.  R.  3  Ch.  App.  467,  476-477; 
Derry  v.  Peek,  L.  R.  14  App.  Cas. 
337,  344. 

24.  L.  R.  20  Ch.  Div.  27,  44,  46 
L.  T.  N.  S.  702,  affirmed,  L.  R.  9 
App.  Cas.  187,  196,  5  Am.  &  Eng. 
Corp..  Cas.  23.  See  also  Capel  & 
Co.  v.  Sim's  Ships  Composition  Co., 
57  L.  J.  Ch.  N.  S.  713,  714;  Law- 
rence's Case,  L.  R.  2  Ch.  App.  412, 
422 ;  Nash  v.  Calthorpe,  1905,  2  Ch. 
Div.  237,  249,  and  cases  cited. 


25.  Baty  v.  Keswick,  85  L.  T.  N. 
S.  18,  W.  N.  1901,  167. 

26.  Bartol    v.    Walton   &   Whann 
Co.,  92  Fed.  Rep.  13,  17;  Negley  v. 
Hagerstown,  etc.,   Co.,  86  Md.   692, 
39  Atl.  506;  Duryea  v.  Zimmerman, 
143  N.   Y.   App.   Div.  60,  127  Supp. 
664;   Reed  v.  Gold,  102  Va.  37,  45 
S.  E.  868;  Smith  v.  Chadwick.  L.  R. 
20  Ch.  Div.  27,  40,  62,  68,  46  L.  T. 
N.   S.    702,   affirmed,   L.   R.   9   App. 


372  THE  LAW  OF  PROMOTERS. 

induced  to  refrain  from  withdrawing  his  subscription.27  The  fact 
that  a  prospectus  was  not  seen  by  the  plaintiff  is  immaterial  if 
statements  therein  contained  were  repeated  to  him  and  he  entered 
his  subscription  in  reliance  thereon.28 

In  Arnison  v.  Smith,29  an  action  was  based  upon  certain  untrue 
statements  contained  in  the  prospectus  and  it  was  claimed  by  the 
defendants  that  the  effect  of  the  false  statement  was  done  away 
with  by  a  later  circular  in  which  the  facts  were  correctly  stated. 
The  court  held  that  the  circular  did  not  have  this*  effect  even  as 
to  those  subscribers  who  had  received  the  circular  before  they  had 
paid  the  entire  subscription  price,  but  reserved  opinion  as  to  what 
would  have  been  the  result  had  the  circular  stated  in  so  many 
words  that  there  had  been  a  misrepresentation  in  the  prospectus 
and  that  the  allottees  might,  if  they  wished,  have  their  instalments 
returned. 

A  subscriber  must,  in  order  to  maintain  his  action  upon  the 
misrepresentations  of  the  promoters,  show  that  he  believed  the 
statements  made  to  him,  and  acted  in  reliance  thereon.  If  he  does 
not  accept  the  statements  of  the  promoters,  but  makes  his  own 
examination,  and  takes  the  shares  as  a  result  of  such  examination, 
and  not  in  reliance  upon  the  promoters'  representations,  he  has  no 
right  of  action  against  the  promoters.30 

Cas.  187,  197,  5  Am.  &  Eng.  Corp.  Fed.  Rep.  449,  68  C.  C.  A.  161,  peti- 

Cas.  23.  tion  for  writ  of  certiorari  denied, 

27.  Hall  v.  Grayson  County  Natl.  197  U.  S.  623,  25  Sup.  Ct.  800,  49  L. 
Bank,  36  Tex.  Civ.  App.  317,  330,  81  Ed.  911 ;  Attwood  v.  Small,  6  Cl.  & 
S.  W.  762,  769.    Cf.  Smith  v.  Chad-  F.  232,  cited  in  Aberaman  Ironworks 
wick,  L.  R.  20  Ch.  Div.  27,  40,  46  L.  v.  Wickens,  L.  R.  5  Eq.  485.     And 
T.  N.  S.  702,  affirmed,  L.  R.  9  App.  see  post,  §  253. 

Cas.  187,  5  Am.  &  Eng.  Corp.  Cas.  Cf.  Smith  v.  Land  &  House  Prop- 

23.  erty  Corporation,  L.  R.  28  Ch.  Div. 

28.  See  ante,  §§  202,  204.  7. 

29.  L.   R.  41  Ch.  Div.  348,  370-  Cf.  also  Foley  v.  Holtry,  43  Neb. 
373.  133,  61  N.  W.  120,  where  the  plain- 

30.  Stratton's  Independence,  Ltd.,  tiff's  inquiries  were  wholly  ineffec- 
v.    Dines,   126   Fed.    Rep.   968,   977-  tual,  the  party  of  whom  he  inquired 
978,  and  cases   cited,  affirmed,  135  having   also   been   deceived   by   the 


FALSE  REPRESENTATIONS.  373 

In  Wakeman  v.  Dalley,31  the  plaintiff  based  his  action  upon  a 
representation  appearing  on  the  face  of  a  printed  business  card 
of  an  insurance  company.  It  appeared  that  he  had  made  inquiries 
in  relation  to  the  subject  matter  of  such  representation  at  the 
office  of  the  company.  This,  it  was  held,  showed  that  he  did  not 
rely  upon  the  card,  and  a  judgment  in  his  favor  was  reversed. 

It  was  held  in  Cuba  Colony  Co.  v.  Kirby  32  that  though  the 
plaintiff  at  first  doubted  the  truth  of  the  promoters'  statements, 
he  could  still  hold  them  responsible  as  he  was  induced  by  them  to 
resolve  his  doubts  in  their  favor,  and  to  act  upon  the  faith  of 
their  statements. 

It  is  not  necessary  that  the  subscriber  show  that  he  relied  upon 
the  absolute  correctness  of  the  representations  made.  Though  he 
discounted  the  representations  he  may  still  have  been  deceived 
thereby,  and  he  is,  if  that  is  so,  entitled  to  recover.33 

§  206.  The   same  subject. — Agreement  not  to  rely  on  repre- 
sentations. 

A  stipulation  of  the  subscriber  that  he  does  not  rely  upon  the 
representations  of  the  promoters,  but  takes  the  shares  at  his  own 
risk,  might  bar  his  right  to  relief  in  case  of  an  innocent  misstate- 
ment,34  but  would  not  save  the  promoters  from  liability  for  a  de- 
liberate fraud.35 

§  207.  Knowledge  of  falsity  of  representations. 

The  House  of  Lords  in  Derry  v.  Peek  36  established  the  rule 

report     upon     which    the    plaintiff  Am.  &  Eng.  Corp.  Cas.  23),  citing 

based  his  suit.  Brownlie  v.  Campbell,  L.  R.  5  App. 

31.  51  N.  Y.  27,  10  Am.  Rep.  551.  Cas.  925.    See  ante,  §§  113,  132. 

32.  149  Mich.  453,  458,  112  N.  W.  35.  Pearson  &  Son,  Ltd.,  v.  Dub- 
1133,  1135.  lin  Corporation,  1907,  App.  Cas.  351, 

33.  Byers    Bros.    v.    Maxwell,  365,  and  cases  cited.     See  ante,  §§ 
(Tex.),  73  S.  W.  437.  113,  132. 

34.  Smith  v.  Chadwick,  L.  R.  20  36.  L.   R.   14   App.   Cas.   337,   re- 
Ch.  Div.  27,  44^5,  46  L.  T.  N.  S.  702,  versing,  Peek  v.  Berry,  L.  R,  37  Ch. 
(affirmed,  L.  R.  9  App.  Cas.  187,  5  Div.  541;  see  also  Glasier  v.  Rolls, 


374  THE  LAW  OF  PROMOTERS. 

that  in  order  that  the  authors  of  a  prospectus  may  be  held 
liable  for  fraud  and  deceit  because  of  misstatements  contained 
therein,  it  must  be  shown,  either  that  the  defendants  knew  at  the 
time  of  circulating  the  prospectus  that  their  representations  were 
untrue,  or  that  they  made  the  representations  without  any  opinion 
as  to  their  truth  or  falsity,  and  that  the  authors  of  the  prospectus 
are  not  liable  for  fraud  and  deceit  if  they  honestly  believed  their 
representations  to  be  true  though  they  had  in  fact  no  reasonable 
ground  for  such  belief.37  The  facts  in  Derry  v.  Pee,k  were  that 
the  prospectus  of  a  tramway  company  stated  that  "  one  great 
feature  of  this  undertaking,  to  which  considerable  importance 
should  be  attached,  is,  that  by  the  special  Act  of  Parliament  ob- 
tained, the  company  has  the  right  to  use  steam  or  mechanical 
motive  power,  instead  of  horses,  and  it  is  fully  expected  that  by 
means  of  this  a  considerable  saving  will  result  in  the  working  ex- 
penses of  the  line  as  compared  with  other  tramways  worked  by 
horses."  It  later  appeared  that  the  right  of  the  company  to  use 
steam  or  mechanical  power  instead  of  horses  was  not  an  absolute 
right,  but  conditional  upon  the  approval  of  the  Board  of  Trade 
which  subsequently  refused  its  consent  except  as  to  portions  of 
the  line.  The  court  held  that  the  directors  had  made  the  state- 


L.    R.   42   Ch.    Div.   436;    Angus   v.  Smith,  L.  R.  41  Ch.   Div.  348,  371, 

Clifford,  1891,  2  Ch.  Div.  449,  463-  and   in    Smith   v.   Chadwick,    L.   R. 

465,  469-470,  474 ;  Low  v.  Bouverie,  20  Ch.  Div.  27,  44,  68,  72-73,  75,  46  L. 

1891,  3  Ch.  Div.  82,  100;  Le  Lievre  T.  N.  S.  702,  must  be  deemed  over- 

v.  Gould,  1893,  1  Q.  B.  D.  491,  498,  ruled.     As  to  liability  for  a   state- 

501 ;    Smith   v.   Chadwick,   L.   R.   9  ment  of  fact  based  upon  the  opinion 

App.  Cas.   187,  203,  5  Am.   &  Bng.  of  counsel,  see  Eaglesfield  v.  Mar- 

Corp.    Cas.    23;    Western    Bank    of  quis  of  Londonderry,   L.   R.  4   Ch. 

Scotland   v.    Addie,    L.    R.   1    Se.   &  Div.  693,  704,  affirmed,  38  L.  T.  N. 

Div.  App.  145,  168,  cf.  162;  Petrie  S.  303,  and  see  note  47  infra,  and 

v.  Guelph  Lumber  Co.,  11  Can.  Sup.  §  210. 

Ct.  450,  15  Am.  &  Eng.  Corp.  Cas.          37.  See  the  interesting  article  on 

487,  affirming,  11  Ont.  App.  336,  af-  "  Liability  for  Negligent  Language  " 

firming,  2  Ont.  218.  Jeremiah    Smith    in    the    Harvard 

The    statements    in    Arnison    v.  Law  Review,  November,  1900. 


FALSE  REPRESENTATIONS.  375 

ment  complained  of  in  an  honest  belief  as  to  its  truth  38  and  were 
not  liable  for  fraud.  The  decision  of  Derry  v.  Peek  caused  much 
dissatisfaction,  and  Parliament  in  the  following  year  enacted  the 
Directors  Liability -Act  39  (Lord  Herschell,  who  wrote  the  princi- 
pal opinion  in  Derry  v.  Peek,  himself  moving  the  bill  for  second 
hearing),40  providing  in  substance  that  a  promoter  who  is  a  party 
to  the  preparation  of  a  prospectus,  shall  be  liable  to  pay  compen- 
sation to  all  parties  who  subscribe  on  the  faith  thereof,  for  the 
damages  sustained  by  them  by  reason  of  any  untrue  statement 
therein,  unless  it  is  proved  that  the  promoter  had  reasonable 
ground  to  believe,  and  did  up  to  the  time  of  the  allotment  believe,, 
the  statement  to  be  true ;  or  unless  it  is  proved  that  after  the  issue 
of  the  prospectus  and  before  allotment  thereunder,  the  promoter, 
on  becoming  aware  of  any  untrue  statement  therein,  withdrew  his 
consent  thereto,  and  caused  reasonable  public  notice  of  such  with- 
drawal, and  of  the  reason  therefor,  to  be  given.  The  statute  fur- 
ther provides  that  a  promoter  shall  be  liable  to  pay  compensa- 
tion for  loss  or  damage  sustained  as  a  result  of  any  untrue  state- 
ment purporting  to  be  an  extract  from  the  report  of  an  expert, 
if  it  is  proved  that  the  promoter  had  no  reasonable  ground 
to  believe  that  the  person  making  the  report  was  competent  to, 
make  it. 

38.  See  the  criticisms  of  this  con-  Ch.    Div.    393 ;    Thomson    r.    Lord 
elusion  in  5  Law  Quarterly  Review,  Clanmorris,    1900,    1   Ch.    Div.    718, 
410,  and  6  Law  Quarterly  Review,  727;    Stevens    v.    Hoare,    20   Times 
72,    and    see    Editorial    New    York  Law  Rep.  407;  Adams  v.  Thrift,  L. 
Law  Journal,  May  17,  1912.  R.  1915,  2  Ch.  Div.  21 ;  1915  Weekly 

39.  Directors'     Liability    Act    of  Notes     207,     affirming     Adams     v. 
1890,     (Stat.    53    and    54    Victoria,  Thrift,  L.  R.  1915,  1  Ch.  Div.  557, 
Chap.  64),  now  contained  in   §  84  1915  Weekly  Notes,  87. 

of  the  Company's  Act  of  1908,  Stat  In  Alman  v.  Oppert,  1901,  2  K. 
8  Edw.  VII,  Chap.  69.  See  also  B.  576,  the  defendants  were  corn- 
Chap.  216,  Ontario  Revised  Statutes,  pelled  in  advance  of  the  trial  to  fur- 
1897.  Cases  involving  these  stat-  nish  a  bill  of  particulars  of  the 
utes  are  McConnell  v.  Wright,  1903,  grounds  of  their  belief. 
1  Ch.  Div.  546,  551-552,  555,  558-  40.  Hansard's  Parliamentary  De- 
659;  Drincqbier  v.  Wood,  1899,  1  bates,  Vol.  346,  (6th  vol.  of  1890), 

1696-1711. 


376 


THE  LAW  OF  PROMOTERS. 


While  the  situation  disclosed  by  the  decision  of  Derry  v.  Peek  41 
was,  in  England,  promptly  remedied  by  statute,42  the  question  is 
in  this  country  still  controlled  by  the  common  law.43 

The  decision  of  Derry  v.  Peek  is,  therefore,  of  greater  practical 
importance  here  than  in  England.  While  the  decision  of  Derry  v. 
Peek  has,  because  of  the  particular  state  of  facts  there  involved, 
been  criticised,  the  rule  there  stated  that  a  liability  for  false  repre- 
sentations cannot  be  based  on  mere  negligence,  ignorance  or  stu- 
pidity, is  undoubtedly  sustained  by  the  great  weight  of  t  author- 
ity.44 The  rule  that  it  must,  in  order  to  sustain  an  action  for 


41.  See  note  36,  supra. 

42.  See  note  39,  supra. 

43.  The    provisions    of   the   New 
York  Stock  Corporation  law,  (Laws 
of  1909,   Chapter  61,    §   35),   make 
officers  or  directors  of  a  stock  cor- 
poration  absolutely  responsible  for 
material     misrepresentations     con- 
tained in  any  certificate,  report  or 
public  notice,   (Parsons  v.  Johnson, 
28  N.   Y.   App.  Div.  1,  5,  50  Supp. 
780;  Hutchinson  v.  Young,  93  N.  Y. 
App.  Div.  407,  408,  87  Supp.  678), 
but  this  statute  does  not  apply  to 
promoters. 

44.  Lord    v.    Goddard,    13    How. 
(U.    S.)    198,    211,    14    L.    Ed.    Ill; 
Hindman   v.    First   National   Bank, 
112  Fed.  Rep.  931,  944,  50  C.  C.  A. 
623,   57    L.    R.    A.    108;    Kimber   v. 
Young,  137  Fed.  Rep.  744,  70  C.  C. 
A.  178 ;  First  National  Bank  v.  Peo- 
ples' National  Bank,  97  Ark.  15,  132 
S.   W.   1008;   Nash   v.   Rosesteel,   7 
Cal.  App.  504,  94  Pac.  850;  Watson 
v.  Jones,  41   Fla.  241,  25   So.  678; 
Holdom  v.  Ayer,  110  111.  448;  Her- 
man   v.    Foster,    185    111.    App.    97; 
Boddy  v.  Henry,  113  Iowa  462,  85 
N.  W.  771,  53  L.  R.  A.  769 ;  Warfield 


v.  Clark,  118  Iowa  69,  75,  91  N.  W. 
833,  836;  Trimble  v.  Reid,  97  Ky. 
713,  31  S.  W.  861;  Hammatt  v. 
Emerson,  27  Me.  308,  46  Am.  Dec. 
598;  Cahill  v.  Applegarth,  98  Md. 
493,  56  Atl.  794;  Donnelly  v.  Balti- 
more Trust  &  Guarantee  Co.,  102 
Md.  1,  61  Atl.  301;  Nash  v.  Minne- 
sota Title  Ins.  &  Trust  Co.,  163 
Mass.  574,  40  N.  E.  1039,  47  Am. 
St.  R.  489,  28  L.  R.  A.  753;  Sims  v. 
Eiland,  57  Miss.  607;  Lovelace  v. 
Suter,  93  Mo.  App.  429,  67  S.  W. 
737;  Snyder  v.  Stemmons,  151  Mo. 
App.  156,  131  S.  W.  724;  Cowley  v. 
Smyth,  46  N.  J.  L.  380,  50  Am.  Rep. 
432;  Kountze  v.  Kennedy,  147  N.  Y. 
124,  41  N.  E.  414,  29  L.  R.  A.  360, 
49  Am.  St.  R.  651 ;  Marsh  v.  Falker, 
40  N.  Y.  562;  Chester  v.  Comstock, 
40  N.  Y.  575 ;  Lamberton  v.  Dun- 
ham, 165  Pa.  129,  30  Atl.  716 ;  Cabot 
v.  Christie,  42  Vt.  121,  1  Am.  Rep. 
313. 

Compare  Holcomb  v.  Noble,  69 
Mich.  396,  37  N.  W.  497;  Johnson 
v.  Gulick,  46  Neb.  817,  65  N.  W. 
883,  50  Am.  St.  Rep.  629,  (but  see 
Gerner  v.  Mosher,  58  Neb.  135,  78 
N.  W.  384,  46  L.  R.  A.  244,  and  Wil- 


FALSE  REPRESENTATIONS. 


377 


fraud  and  deceit,  be  shown  that  the  false  representation  was  made 
either  with  knowledge  of  its  falsity  or  else  without  a  real  belief  in 
its  truth, — in  other  words  that  there  can  be  no  action  for  fraud 
and  deceit  as  long  as  the  defendant  honestly  believed  his  repre- 
sentations to  be  true — is  generally  followed  in  this  country  with 
the  qualification  that  if  a  person  make  a  statement  as  of  his  own 
knowledge,  of  a  fact  susceptible  of  actual  knowledge,  he  may,  if 
his  representations  prove  untrue,  be  held  liable  for  fraud  and 
deceit  though  he  believed  the  fact  to  be  as  represented  by  him.45 


lard  v.  Key,  83  Neb.  850,  120  N. 
W.  419) ;  Seale  v.  Baker,  70  Tex. 
283,  290,  7  S.  W.  742,  8  Am.  St. 
Rep.  592. 

The  American  cases  citing  Derry 
v.  Peek  are  collated  in  a  note  to 
Davis  v.  Trent,  49  L.  R.  A.  N.  S. 
1219. 

The  burden  is  on  the  plaintiff  to 
prove  that  the  defendants  knew 
their  representations  to  be  false. 
Hubbard  v.  Weare,  79  Iowa  678,  688, 
44  N.  W.  915;  Duryea  v.  Zimmer- 
man, 121  N.  Y.  App.  Div.  560,  106 
Supp.  237;  Nelson  v.  Luling,  36  N. 
Y.  Super.  544,  affirmed,  62  N.  Y. 
645;  Knox  v.  Hayman,  67  L.  T.  N. 
S.  137;  Glasier  v.  Rolls,  L.  R.  42 
Ch.  Div.  436. 

The  promoter  would,  no  doubt,  be 
liable  in  damages  if,  though  he 
made  his  representations  believing 
them  to  be  true,  he,  after  discover- 
ing their  falsity,  allowed  the  sub- 
scribers to  take  and  pay  for  their 
shares  in  reliance  thereon.  Aaron's 
Reefs  v.  Twiss,  1896,  App.  Gas.  273, 
289;  cf.  Arkwright  v.  Newbold,  L. 
R.  17  Ch.  Div.  301,  316,  et  seq.,  329 ; 
Hoole  v.  Speak,  1904,  2  Ch.  Div. 
732.  See  also  post,  §  226. 


45.  Federal. — Schagun  v.  Scott 
Mfg.  Co.,  162  Fed.  Rep.  209,  222, 
89  C.  C.  A.  189;  Barnes  v.  Union 
Pacific  Ry.  Co.,  54  Fed.  Rep.  87,  90, 
4  C.  C.  A.  199.  See  Union  Pac.  Ry. 
Co.  v.  Barnes,  64  Fed.  Rep.  80,  12  C. 
C.  A.  48,  27  U.  S.  App.  421. 

Connecticut. — Scholfield  Gear  & 
Pulley  Co.  v.  Scholfield,  71  Conn.  1, 
19,  40  Atl.  1046. 

Iowa. — Hubbard  v.  Weare,  79 
Iowa  678,  688,  44  N.  W.  915;  Riley 
v.  Bell,  120  Iowa  618,  624,  et  seq., 
95  N.  W.  170 ;  Evans  v.  Palmer,  137 
Iowa  425,  114  N.  W.  912;  cf.  Davis 
v.  Central  Land  Co.,  162  Iowa  269, 
143  N.  W.  1073,  49  L.  R.  A.  N.  S. 
1219. 

Kentucky. — Livermore  v.  Middles- 
borough  Town  Lands  Co.,  106  Ky. 
140,  163,  50  S.  W.  6,  13,  20  Ky.  Law 
Rep.  1704. 

Maryland. — Cahlll  v.  Applegarth, 
98  Md.  493,  56  Atl.  794,  and  cases 
cited. 

Massachusetts. — Fisher  v.  Mellen, 
103  Mass.  503;  Litchfield  v.  Hut- 
chinson,  117  Mass.  195;  Cole  v. 
Cassidy,  138  Mass.  437,  52  Am.  Rep. 
284;  Chatham  Furnace  Co.  v.  Mof- 
fatt,  147  Mass.  403,  18  N.  E.  168, 


378 


THE  LAW  OF  PROMOTERS. 


The  fraud  in  such  case  consists  in  the  defendant's  assertion  that 
he  knows  the  matters  stated  by  him  to  be  true  when  he  actually 
does  not  know,  but  only  believes,  them  to  be  true, — in  asserting  a 
knowledge  which,  presumably,  he  knows  that  he  does  not  possess.46 
The  defendant  can,  in  such  case,  escape  liability  only  if  he  actually 
believed  that  he  had  the  knowledge  which  he  claimed,  and  his  mere 
affirmation  of  such  belief  would  amount  to  little  in  the  absence  of 
proof  that  he  relied  upon  information  which  fairly  justified  his 


9  Am.  St.  Rep.  727;  Weeks  v.  Cur- 
rier, 172  Mass.  53,  51  N.  E.  416; 
Arnold  v.  Teel,  182  Mass.  1,  64  N. 
E.  413;  Adams  v.  Collins,  196  Mass. 
422,  429,  82  N.  E.  498. 

Minnesota. — Bullitt  v.  Farrar,  42 
Minn.  8,  11,  43  N.  W.  566,  18  Am. 
St.  R.  485,  6  L.  R.  A.  149. 

Mississippi. — Sims  v.  Eiland,  57 
Miss.  607. 

Nebraska. — Gerner  v.  Mosher,  58 
Neb.  135,  149,  78  N.  W.  384,  46  L.  R. 
A.  244;  Foley  v.  Holtry,  43  Neb. 
133,  137,  61  N.  W.  120;  Johnson  v. 
Gulick,  46  Neb.  817,  65  N.  W.  883, 
50  Am.  St.  Rep.  629;  Moore  v. 
Scott,  47  Neb.  346,  350,  66  N.  W. 
441;  Willard  v.  Key,  83  Neb.  850, 
120  N.  W.  419. 

Neic  Hampshire. — Spead  v.  Tom- 
linson,  73  N.  H.  46,  59  Atl.  376,  68 
L.  R.  A.  432. 

New  fork. — Hadcock  v.  Osmer, 
153  N.  Y.  604,  608,  47  N.  E.  923; 
Daly  v.  Wise,  132  N.  Y.  306,  312, 
30  N.  E.  837,  16  L.  R.  A.  236;  Marsh 
v.  Falker,  40  N.  Y.  562 ;  Cazeaux  v. 
Mali,  25  Barb.  578,  583-584; 
Kountze  v.  Kennedy,  147  N.  Y.  124, 
132-133,  41  N.  E.  414,  29  L.  R.  A. 
360,  49  Am.  St.  Rep.  651;  Garrett 
Co.  v.  Astor,  67  App.  Div.  595,  598, 


73  Supp.  966;  Booth  v.  Englert,  105 
App.  Div.  284,  94  Supp.  700;  Wake- 
man  v.  Dalley,  51  N.  Y.  27,  35,  10 
Am.    Rep.    551,    and    cases    cited ; 
Frank   v.   Bradley   Currier   Co.,   42 
App.  Div.  178,  181,  58  Supp.  1032; 
Second  National  Bank  v.  Curtiss,  2 
App.  Div.  508,  512,  37   Supp.   1028, 

74  St.   R.   323,   affirmed,   153  N.   Y. 
681,  48  N.  E.  1107. 

Texas. — Benton  v.  Kuykendall,  — 
Tex.  Civ.  App.  — ,  160  S.  W.  438. 

Vermont. — Johnson  v.  Cate,  75 
Vt.  100,  103,  53  Atl.  329;  Cabot  v. 
Christie,  42  Vt.  121,  126,  1  Am. 
Rep.  313;  Darling  v.  Stuart,  63  Vt. 
570,  22  Atl.  634. 

See  note  to  Hedin  v.  Minneapolis 
M.  &  S.  Inst,  35  L.  R.  A.  417,  430- 
431. 

46.  Federal. — Schagun  v.  Scott 
Mfg.  Co.,  162  Fed.  Rep.  209,  222, 
89  C.  C.  A.  189. 

Connecticut. — Scholfield  Gear  & 
Pulley  Co.  v.  Scholfield,  71  Conn.  1, 
19,  40  Atl.  1046. 

Iowa. — Hubbard  v.  Weare,  79 
Iowa  678,  688,  44  N.  W.  915;  Riley 
v.  Bell,  120  Iowa  618,  626,  95  N.  W. 
170;  Smith  v.  Packard  Co.,  152 
Iowa  1,  10,  130  N.  W.  1076. 

Massachusetts. — Litchfield  v.  Hut- 


FALSE  REPRESENTATIONS. 


379 


belief.47  This  qualification  of  the  rule  of  Derry  v.  Peek  is  appli- 
cable only  where  the  defendant  expressly  or  impliedly  made  his 
representations  as  of  his  own  personal  knowledge.  An  assertion 
of  personal  knowledge  may  sometimes,  depending  on  the  circum- 
stances of  the  case,  be  implied  from  an  unqualified  statement  of 
a  fact.48  Whether  an  unqualified  statement  made  by  a  promoter 
may  be  interpreted  as  an  assertion  of  personal  knowledge,  must, 
however,  depend  upon  all  the  facts  of  the  particular  case.  If  a 
promoter  makes  a  personal  representation  in  regard  to  a  business 
or  a  property  with  which  he  has  long  been  connected,  or  in  relation 


chinson,  117  Mass.  195;  Chatham 
Furnace  Co.  v.  Moffatt,  147  Mass. 
403,  18  N.  E.  168,  9  Am.  St.  Rep. 
727. 

Mississippi. — Vincent  v.  Corbett, 
94  Miss.  46,  47  So.  641,  21  L.  R.  A. 
N.  S.  85. 

Missouri. — Lovelace  v.  Suter,  93 
Mo.  App.  429,  67  S.  W.  737 ;  Serrano 
v.  Miller  &  Teasdale  Commission 
Co.,  117  Mo.  App.  185,  93  S.  W. 
810. 

47.  Scholfield  Gear  &  Pulley  Co. 
v.  Scholfield,  71  Conn.  1,  19,  40 
Atl.  1046 ;  Lovelace  v.  Suter,  93  Mo. 
App.  429,  67  S.  W.  737;  Peters  v. 
Lohman,  171  Mo.  App.  465,  156  S. 
W.  783. 

See  Huntress  v.  Blodgett,  (206 
Mass.  318,  324,  92  N.  E.  427), 
where  it  is  said  that  due  diligence 
to  ascertain  the  truth  in  regard  to 
statements  made  as  of  matters  of 
fact  within  one's  own  knowledge, 
is  not  enough  to  relieve  the  maker 
of  them  of  liability  if  they  are 
false. 

As  to  assertions  based  upon  the 
opinion  of  counsel,  see  Downey  v. 
Finucane,  146  N.  Y.  App.  Div.  209, 


216,  130  Supp.  988,  affirmed,  205 
N.  Y.  251,  98  N.  E.  391,  40  L.  R.  A. 
N.  S.  307;  Kountze  v.  Kennedy,  147 
N.  Y.  124,  41  N.  E.  414,  29  L.  R. 
A.  360,  49  Am.  St.  Rep.  651;  and 
see  note  36,  supra  and  post,  §  210. 

The  defendant  may,  of  course, 
testify  as  to  the  grounds  of  his 
belief.  Given  v.  Powell,  145  N.  Y. 
App.  Div.  559,  129  Supp.  869. 

48.  Indiana. — K  irkpatrick  v. 
Reeves,  121  Ind.  280,  282,  22  N.  E. 
139. 

Minnesota Bullitt  v.  Farrar,  42 

Minn.  8,  11,  43  N.  W.  566,  18  Am. 
St.  R.  485,  6  L.  R.  A.  149 ;  Knappen 
v.  Freeman,  47  Minn.  491,  50  N. 
W.  533;  Freeman  v.  Harbaugh  Co., 
114  Minn.  283,  130  N.  W.  1110. 

Mississippi. — Vincent  v.  Corbett, 
94  Miss.  46,  47  So.  641,  21  L.  R.  A. 
N.  S.  85. 

Missouri. — Hamlin  v.  Abell,  120 
Mo.  188,  203,  25  S.  W.  516 ;  Herman 
v.  Hall,  140  Mo.  270,  276,  41  S.  W. 
733. 

New  York. — Marsh  v.  Falker,  40 
N.  Y.  562. 

Texas — Gibbens  v.  Bourland,  — 
Tex.  Civ.  App.  — ,  145  S.  W.  274. 


380  THE  LAW  OF  PROMOTERS. 

to  which  he  has  special  knowledge,  the  inference  that  the  state- 
ment is  made  of  his  own  knowledge  may  readily  be  sustained. 
Where,  however,  the  representations  complained  of  are  contained 
in  a  printed  prospectus  signed  by  a  number  of  promoters,  and 
made  in  relation  to  matters  which  could  be  ascertained  only  by 
the  examination  of  an  expert,  the  natural  inference  is  that  the 
promoters  are  acting  upon  the  faith  of  reports  made  by  others, 
and  an  assertion  of  personal  knowledge  cannot  reasonably  be  im- 
plied.49 Whether  an  unqualified  statement  made  by  a  promoter 
can  be  interpreted  as  an  assertion  of  personal  knowledge,  will  de- 
pend in  each  case  upon  the  nature  of  the  facts  represented,  the 
experience  and  profession  of  the  particular  promoter  sought  to 
be  held,  his  relationship  to  the  complainant  and  the  means  by 
which  the  representations  were  conveyed.  The  fact  that  the 
defendant  did  not  even  believe  his  representations  to  be  true  may 
sometimes,  however,  be  inferred  from  the  fact  that  he  had  no  reason- 
able ground  for  such  belief,50  and  knowledge  of  the  falsity  of  his 
representations  may  sometimes  be  charged  to  the  defendant  be- 
cause of  the  fact  that  his  situation  or  means  of  knowledge  were  such 
as  to  make  it  his  duty  to  know  whether  his  representations  were 
true  or  false.51  A  promoter  may  also  be  held  liable  for  damages 
for  fraud  and  deceit  without  proof  of  scienter  if  it  is  shown  that  he 
purposely  abstained  from  knowledge  of  the  facts,  leaving  the  de- 
tails of  the  transaction  to  his  companions,  whose  profits  he 
shared.52 

49.  See  Marsh  v.  Falker,  40  N.  253,  25  So.  678;  Prewitt  v.  Trimble, 
Y.  562,  567.  92  Ky.   176,   17   S.   W.  356,  36  Am. 

50.  Hindman  v.  First  Natl.  Bank,  St.    R.    586;    Trimble    v.    Reid,    97 
112   Fed.    Rep.   931,   944,   50*  C.   C.  Ky.  713,  31  S.  W.  861;  Solomon  v. 
A.  623,  57  L.  R.  A.  108;  Nugent  v.  Bates,  118  N.  C.  311,  24  S.  E.  478, 
Cincinnati,  etc.,   R.   R.   Co.,  2  Dis-  54    Am.    St.    R.    725;    Houston    v. 
ney,    '(Ohio)     302,    305;    Derry    v.  Thornton,  122  N.  C.  365,  29  S.  E. 
Peek,  L.  R.  14  App.  Gas.  337,  369;  827,  65  Am.  St.  R.  699;  Kinkier  v. 
Western  Bank  of  Scotland  v.  Addie,  Junica,  84  Tex.  116,  119,  19  S.  W. 
L.  R.   1   Sc.  &  Div.  App.  Gas.  145,  359. 

168.  52.  Hornblower     v.     Crandall,    7 

51.  Watson  v.  Jones,  41  Fla.  241,      Mo.  App.  220,  affirmed,  78  Mo.  581; 


FALSE  REPRESENTATIONS.  381 

§  208.  Intent  to  deceive. 

It  is  sometimes  said  that  in  order  that  a  promoter  may  be  held 
liable  for  damages  for  fraudulent  representations,  an  intent  to 
deceive  or  defraud  must  be  shown.  This  is  true  in  the  sense  that, 
as  shown  in  the  preceeding  section,  there  must  be  either  an  in- 
tentional misstatement  of  fact,  or  an  unjustifiable  assertion  of 
knowledge  thereof.  It  is  not,  however,  necessary  that  the  defend- 
ant should  intend  to  cheat  or  injure  the  plaintiff.  If  the  defend- 
ant knowingly  misstates  the  facts,  he  is  liable  for  fraud  and  deceit 
though  he  considers  the  shares  a  good  investment  and  honestly 
believes  that  he  is  doing  the  plaintiff  a  kindness  by  inducing  him 
to  subscribe.53 

In  Peek  v.  Gurney,54  a  corporation  was  organized  to  take  over 
a  banking  concern  theretofore  carried  on  by  a  partnership.  The 
fact  that  the  partnership  was  insolvent  was  concealed.  The  pro- 
moters believed  that  the  enterprise  would  be  a  success,  and  that 
the  shares  of  the  corporation  would  prove  an  excellent  investment. 
To  have  disclosed  the  insolvency  of  the  partnership  would  have 
necessitated  its  immediate  liquidation.  The  concealment  was  due, 
not  so  much  to  a  desire  to  deceive  the  subscribers,  as  to  a  desire  to 
save  the  valuable  good  will  of  the  banking  business.  It  was  held 
that  this  was  immaterial  and  that  the  defendants  having  knowingly 
misstated  the  facts  were  guilty  of  fraud. 

§  209.  Innocent  misrepresentation  as  ground  for  rescission. 

When  a  subscriber  instead  of  bringing  an  action  for  damages 
for  false  representations,  seeks  only  to  be  relieved  from  liability 
upon  his  subscription  and  to  recover  the  payments,  if  any,  there- 
Downey  v.  Finucane,  205  N.  Y.  251,  App.  Gas.  187,  201,  5  Am.  &  Eng. 
259,  98  N.  E.  391,  40  L.  R.  A.  N.  S.  Corp.  Cas.  23 ;  Berry  v.  Peek,  L.  R. 
307;  Rives  v.  Bartlett,  156  N.  Y.  14  App.  Cas.  337,  374;  Hubbard  v. 
App.  Div.  552,  141  Supp.  561,  re-  Weare,  79  Iowa  678,  688,  44  N.  W. 
versed,  215  N.  Y.  33,  109  N.  E.  83.  915. 

53.  Smith  v.   Chadwick,  L.   R.  9          54.  L.  R.  13  Eq.  79,  110,  affirmed, 

L.  R.  6  H.  L.  377. 


382 


THE  LAW  OF  PROMOTERS. 


tofore  made  by  him,  the  knowledge  or  fraudulent  intent  of  the 
party  making  the  representations  is  not  material.  However 
honestly  the  person  making  the  representations  may  have  be- 
lieved in  the  truth  thereof,  and  however  reasonable  may  have  been 
such  belief,  a  subscription  induced  by  a  misstatement  cannot  be 
enforced.  The  corporation  cannot  explain  away  a  misstatement 
of  its  promoter  by  showing  that  it  was  honestly  made  and  at  the 
same  time  claim  the  benefit  of  the  subscriptions  that  were  induced 
thereby.55 


55.  Federal. — Hindman  v.  First 
Natl.  Bk.,  112  Fed.  Rep.  931,  944,  50 
C.  C.  A.  623,  57  L.  R.  A.  108;  cf. 
Bartol  v.  Walton  &  Whann  Co.,  92 
Fed.  Rep.  13,  14. 

Alabama. — Southern  States  F.  & 
C.  Ins.  Co.  v.  Wilmer  Stores  Co., 
180  Ala.  1,  60  So.  98. 

Iowa. — Mohler  v.  Carder,  73  Iowa 
582,  35  N.  W.  647 ;  Hunter  v.  French 
League  Safety  Cure  Co.,  96  Iowa 
573,  65  N.  W.  828;  Hubbard  v. 
Weare,  79  Iowa  678,  686,  44  N.  W. 
915 ;  Farnsworth  v.  Muscatine  Prod. 
&  Pure  Ice  Co.,  161  Iowa  170,  141 
N.  W.  940;  Maine  v.  Midland  Inv. 
Co.,  132  Iowa  272,  109  N.  W.  801. 

Kentucky.— Trimble  v.  Reid,  97 
Ky.  713,  31  S.  W.  861. 

Michigan.— Duffield  v.  E.  T.  Bar- 
num  W.  &  I.  Works,  64  Mich.  293, 
305-^306,  31  N.  W.  310,  315-316; 
Converse  v.  Blumrich,  14  Mich.  109, 
123. 

Nevada. — See  Foulks  Accelerating 
Air  Motor  Co.  v.  Thies,  26  Nev.  158, 
65  Pac.  373,  99  Am.  St.  Rep.  684. 

New  York. — Hammond  v.  Pen- 
nock,  61  N.  Y.  145;  Butler  v.  Pren- 
tiss,  158  N.  Y.  49,  60^61,  52  N.  E. 
652;  Talmadge  v.  Sanitary  Security 


Co.,  31  App.  Div.  498,  52  Supp.  139 ; 
The  Canadian  Agency,  Ltd.,  v.  As- 
sets Realization  Co.,  165  App.  Div. 
96,   150   Supp.   758;   cf.   Hodgens   v. 
Jennings,    148    App.    Div.    879,    133 
Supp.  584 ;  Garrett  Co.  v.  Appleton,  N 
101  App.  Div.  507,  509,  92  Supp.  136, 
affirmed,    184   N.    Y.   557,    76  N.    E. 
1099 ;    Lambert    v.    Elmendorf ,    124  ' 
App.  Div.  758,  109  Supp.  574. 

Tennessee. — See  Cunningham  v. 
Edgefield  &  Kentucky  R.  R.  Co.,  2 
Head.  23. 

Texas. — Byers  Bros.  v.  Maxwell, 
73  S.  W.  437. 

United  Kingdom  and  Colonies. — 
Derry  v.  Peek,  L.  R.  14  App.  Gas. 
337,  347,  359;  Karberg's  Case,  1892, 
3  Ch.  Div.  1,  13,  16,  66  L.  T.  N.  S. 
700,  (citing  Redgrave  v.  Hurd,  L. 
R.  20  Ch.  Div.  1,  12)  ;  Wainwright's 
Case,  62  L.  T.  N.  S.  30,  59  L.  J.  Ch. 
N.  S.  281,  affirmed,  63  L.  T.  N.  S. 
429 ;  New  Brunswick  &  Can.  Ry., 
etc.,  Co.  v.  Muggeridge,  1  Dr.  &  Sm. 
863,  383;  Arkwright  v.  Newbold,  L. 
R.  17  Ch.  Div.  301,  320;  Smith's 
Case,  L.  R.  2  Ch.  App.  604,  611, 
615,  affirmed,  sub  nom.  Reese  River 
Silver  Min.  Co.  v.  Smith,  L.  R.  4 
H.  L.  64 ;  Smith  v.  Reese  River  Co., 


FALSE  REPRESENTATIONS. 


383 


A  subscriber  must,  to  obtain  a  rescission  of  his  subscription, 
show  that  the  facts  were  misstated  to  him,  and  that  his  subscrip- 


L.  R.  2  Eq.  264;  In  re  London  & 
Staffordshire  Fire  Ins.  Co.,  L.  R.  24 
Ch.  Div.  149,  153;  Components  Tube 
Co.  v.  Naylor,  1900,  2  Ir.  R.  1,  26, 
81,  82;  In  re  Pacaya  Rubber  & 
Produce  Co.,  Ltd.,  1914,  1  Ch.  Div. 
542,  83  L.  J.  Ch.  N.  S.  432,  110  L. 
T.  N.  S.  578,  30  T.  L.  R.  260;  Mair 
v.  Rio  Grande  Rubber  Estates,  Ltd., 
1913,  App.  Cas.  853,  870;  Petrie 
v.  Guelph  Lumber  Co.,  11  Ont.  App. 
336,  337,  affirmed,  11  Can.  Sup.  Ct. 
450,  15  Am.  &  Eng.  Corp.  Cas.  487; 
cf.  Kennedy  v.  Panama,  etc.,  Mail 
Co.,  L.  R.  2  Q.  B.  580,  587,  et  seq.; 
Jackson  v.  Turquand,  L.  R.  4  H.  L. 
305;  Pulsford  v.  Richards,  17  Beav. 
87,  94 ;  Atkinson  v.  Pocock,  1  Exch. 
796. 

See  Ex  parte  Vickers,  56  L.  T.  N. 
S.  815,  where  the  applicant  was  ad- 
vised by  the  promoters  that  he  could 
not  rely  absolutely  upon  their  in- 
formation ;  also  Mair  v.  Rio  Grande 
Rubber  Estates,  Ltd.,  1913,  App. 
Cas.  853,  868,  872;  In  re  Pacaya 
Rubber  &  Produce  Co.,  Ltd.,  1914,  1 
Ch.  Div.  542,  83  L.  J.  Ch.  N.  S.  432, 
110  L.  T.  N.  S.  578,  30  T.  L.  R.  260, 
and  cases  cited. 

See  also  Bigelow  on  Torts,  (8th 
ed.),  87. 

Cf.  Selma  M.  &  M.  R.  R.  Co.  v. 
Anderson.  51  Miss.  829;  Davis  v. 
Stuard,  99  Pa.  295. 

A  distinction  has  at  times  been 
made  between  the  rescission  of  an 
executory  and  an  executed  contract, 
it  being  held  that  there  must  in  the 
case  of  an  executed  contract  be 


actual  fraud.  Nugent  v.  Cin.,  etc., 
R.  R.  Co.,  2  Disney  (Ohio)  302, 
304 ;  Seddon  v.  N.  E.  Salt  Co.,  Ltd., 
1905,  1  Ch.  Div.  326,  1  Am.  &  Eng. 
Ann.  Cas.  514;  Wilde  v.  Gibson,  1 
H.  L.  Cas.  605,  632;  Angel  v.  Jay, 
1911,  1  K.  B.  666,  80  L.  J.  K.  B.  458 ; 
cf.  Findlay  v.  Baltimore  Trust  & 
Guarantee  Co.,  97  Md.  716,  55  Atl. 
379,  and  cases  cited. 

As  to  the  effect  of  misstatements 
contained  in  reports  quoted  in  pro- 
spectus, see  Mair  v.  Rio  Grande  Rub- 
ber Estates,  Ltd.,  1913,  App.  Cas. 
853;  In  re  Pacaya  Rubber  &  Pro. 
duce  Co.,  Ltd.,  1914,  1  Ch.  Div.  542, 
83  L.  J.  Ch.  N.  S.  432,  110  L.  T.  N. 
S.  578,  30  T.  L.  R.  260. 

A  variation  between  the  draft 
prospectus  upon  which  the  sub- 
scriber entered  his  subscription  and 
the  final  prospectus,  may,  if  sub- 
stantial, justify  the  rescission  of  his 
subscription,  in  spite  of  a  provision 
in  the  subscription  agreement  that 
the  same  shall  hold  good  notwith- 
standing any  variation  between  the 
draft  prospectus  submitted  to  the 
subscriber  and  the  prospectus  as 
finally  settled  and  published.  War- 
ner International,  etc.,  Eng.  Co., 
Ltd.,  v.  Kilburn,  Brown  &  Co.,  110 
L.  T.  N.  S.  456,  84  L.  J.  K.  B.  N.  S. 
365,  1914  Weekly  Notes  61,  30 
Times  Law  Reports  284. 

A  material  alteration  of  the  sub- 
scription agreement  after  signature 
is  ground  for  rescission.  Sheffield's 
Case,  Johns.  Ch.  (Eng.)  451,  5  Jur. 
N.  S.  216. 


384 


THE  LAW  OF  PROMOTERS. 


tion  was  made  as  a  result  of  such  misstatement.56  A  subscription 
cannot  be  rescinded  because  of  a  mere  misunderstanding  on  the 
part  of  the  subscriber,57  because  of  a  subsequent  improvident  issue 
of  shares,58  because  of  mismanagement  in  the  organization  of  the 
corporation,59  or  because  the  enterprise  does  not  fulfil  the  hopes 
entertained  for  it.60 

It  has  been  held  that  a  subscription  induced  by  a  statement 
which  was  false  when  made,  may  be  rescinded  in  spite  of  the  fact 
that  such  statement  subsequently  became  true.61 

§  210.  Fraud  by  concealment. 

That  fraud  may  be  committed  by  the  suppression,  as  well  as  by 
the  misstatement  of  a  material  fact,  is  not  open  to  doubt.62  "  It 
appears  to  me,"  said  Vice  Chancellor  Kindersley  in  New  Bruns- 
wick and  Canada  Railway  Co.  v.  Muggeridge,63  "  that  it  is  quite 


As  to  the  effect  of  substituting  a 
new  sheet  in  the  articles  of  incor- 
poration signed  by  the  complaining 
subscriber,  see  Felgate's  Case,  2 
DeG.  J.  &  S.  456. 

56.  Weems  v.  Georgia  M.  &  G.  R. 
R.   Co.,   88   Ga.   303,    14   S.   E.   503; 
Wenstrom  Consol.  Dynamo  &  Motor 
Co.  v.  Purnell,  75  Md.  113,  120,  23 
Atl.  134,  and  cases  cited ;  Walker  v. 
Mobile  &  Ohio  R.  R.  Co.,  34  Miss. 
245,  256;  Jennings  v.  Broughton,  17 
Beav.   234,    affirmed,    5   DeG.    M.    & 
G.  126. 

57.  Kelsey  v.  Northern  Light  Oil 
Co.,  54  Barb.  Ill,  affirmed,  45  N.  Y. 
505. 

58.  Hornaday  v.  Ind.  &  111.  Cent. 
Ry.  Co.,  9  Ind.  263. 

59.  Runkle  v.  Burrage,  202  Mass. 
89,  88  N.  E.  573. 

60.  Salem  Mill  Dam  Corporation 
v.  Ropes,  9  Pick.   (Mass.)   187,  197, 
19  Am.  Dec.  363. 


61.  Lehman-Charley    v.    Bartlett, 
135  N.    Y.   App.   Div.   674,  683,   120 
Supp.  501,  affirmed,  202  N.  Y.  524, 
95  N.  E.  1125. 

As  to  the  validity  of  this  defense 
in  an  action  for  damages,  see  Mc- 
Cpnnell  v.  Wright,  1903,  1  Ch.  Div. 
546;  cf.  Ship  v.  Crosskill,  L.  R.  10 
Eq.  73.  See  post,  §  226. 

62.  Pulsford     v.      Richards,      17 
Beav.  87.    See  note  to  Fear  v.  Bart- 
lett, 33  L.  R.  A.  721,  735-736,  and 
note  to  Lomita  Land  &  Water  Co.  v. 
Robinson,   18  L.   R.   A.   N.   S.   1106, 
1109.      As    to    fraudulent    conceal- 
ments generally  see  14  Am.  &  Eng. 
Encyc.    of    Law    (2nd    Ed.)    66,    et 
seq.     See  also   cases   cited   in  suc- 
ceeding notes.    And  see  post,  §§  232 
and  233. 

63.  1  Drewry  &  Smale,  363,  381- 
382,   (see  also  page  367),  quoted  in 
Directors    of    Central    Railway    of 
Venezuela  v.  Kisch,  L.  R.  2  H.  L. 


FALSE  REPRESENTATIONS.  385 

necessary  to  uphold  this  as  a  principle:  that  those  who  issue  a 
prospectus  holding  out  to  the  public  the  great  advantages  which 
will  accrue  to  persons  who  will  take  shares  in  a  proposed  under- 
taking, and  inviting  them  to  take  shares  on  the  faith  of  the  repre- 
sentations therein  contained,  are  bound  to  state  everything  with 
strict  and  scrupulous  accuracy,  and  not  only  to  abstain  from 
stating  as  facts  that  which  is  not  so,  but  to  omit  no  one  fact  within 
their  knowledge,  the  existence  of  which  might  in  any  degree  affect 
the  nature,  or  extent,  or  quality  of  the  privileges  and  advantages 
which  the  prospectus  holds  out  as  inducements  to  take  shares." 

In  Directors  of  Central  Railway  Co.  of  Venezuela  v.  Kisch,64 
Chelmsford,  L.  C.,  said,  "  Although,  in  its  introduction  to  the 
public,  some  high  colouring,  and  even  exaggeration,  in  the  descrip- 
tion of  the  advantages  which  are  likely  to  be  enjoyed  by  the  sub- 
scribers to  an  undertaking,  may  be  expected,  yet  no  misstatement 
or  concealment  of  any  material  facts  of  circumstances  ought  to 
be  permitted.  In  my  opinion,  the  public,  who  are  invited  by  a 
prospectus  to  join  in  any  new  adventure,  ought  to  have  the  same 
opportunity  of  judging  of  everything  which  has  a  material  bear- 
ing on  its  true  character,  as  the  promoters  themselves  possess. 
It  cannot  be  too  frequently  or  too  strongly  impressed  upon  those 
who,  having  projected  any  undertaking,  are  desirous  of  obtaining; 
the  co-operation  of  persons  who  have  no  other  information  on  the 
subject  than  that  which  they  choose  to  convey,  that  the  utmost 
candour  and  honesty  ought  to  characterize  their  published  state- 
ments." 

In  Aaron's  Reefs  v.  Broadhurst,65  Wright,  J.,  is  said  to  have 
remarked  that  the  strict  rule  of  Muggeridge's  case  would  be  fatal 
to  most  prospectuses  of  the  day.  The  answer  to  this,  said  Lord 

99,    113,    16   L.    T.    N.    S.    500,   also  R.  5  Eq.  249,  262,  17  L.  T.  N.  S.  527. 

in  Components  Tube  Co.  v.  Naylor,  64.  L.  R.  2  H.  L.  99,  113,  16  L.  T. 

1900,  2  Ir.  R.  1,  26-27,  39,  80,  and  N.  S.  500. 

approved  in  Henderson  v.  Lacon,  L.  65.  Unreported. 


386  THE  LAW  OF  PROMOTERS. 

Justice  Fitz  Gibbon  in  Aaron's  Reefs  v.  Twiss  66  is — "  So  much  the 
better.  If  the  company  cannot  float  if  the  whole  truth  be  dis- 
closed by  its  prospectus,  it  cannot  be  honestly  launched  at  all." 

Some  authorities  make  a  distinction  between  a  concealment  that 
may  be  made  the  basis  of  the  rescission  of  a  subscription  to  the 
company's  shares,  and  a  concealment  that  gives  rise  to  an  action 
/or  fraud  and  deceit.  In  Peek  v.  Gurney,67  Lord  Cairns  said, 
"  Mere  non-disclosure  of  material  facts,  however  morally  cen- 
surable, however  that  non-disclosure  might  be  a  ground  in  a 
proper  proceeding  at  a  proper  time  for  setting  aside  an  allotment 
or  a  purchase  of  shares,  would  in  my  opinion  form  no  ground  for 
an  action  in  the  nature  of  an  action  for  misrepresentations.  There 
must,  in  my  opinion,  be  some  active  misstatement  of  fact,  or,  at  all 
events,  such  a  partial  and  fragmentary  statement  of  fact,  as  that 
the  withholding  of  that  which  is  not  stated  makes  that  which  is 
stated  absolutely  false." 

In  Components  Tube  Co.  v.  Naylor,68  Palles,  C.  B.,  after  an  ex- 
haustive review  of  the  authorities,  stated  his  conclusions  as  fol- 
lows: 

"  1.  That  where  the  circumstances  are  such  that  there  can  be 
rescission,  and  restitutio  in  integrum,  the  rule  as  to  disclosure  is 

66.  1895,  2  Ir.  207,  269,  (affirmed,  distinction,  lay  down  the  rule  that 
1896,    App.    Cas.    273).     Quoted   in  there  can  be  no  rescission  because 
Components    Tube    Co.    v.    Naylor,  of   the   omission   of   material   facts 
1900,  2  Ir.  1,  42.  unless  the  effect  of  such  omissions 

67.  L.  B.  6  H.  L.  377,  403 ;  Smith  is  to  make  the  statements  afflrma- 
v.  Chadwick,  L.  R.  20  Ch.  Div.  27,  tively  made  misleading.     McKeown 
36,  58,  46  L.  T.  N.  S.  702,  affirmed,  v.  Boudard-Peveril  Gear  Co.,  65  L. 
L.  R.  9  App.  Cas.  187,  5  Am.  &  Eng.  J.  Ch.  N.  S.  735 ;  In  re  Christineville 
Corp.    Cas.    23 ;    see    also    Aaron's  Rubber  Estates,  Ltd.,  106  L.  T.  N.  S. 
Reefs  v.  Twiss,  1895,  2  Ir.  207,  248,  260,  81  L.  J.  Ch.  N.  S.  63;  Aaron's 
(affirmed,    1896,    App.    Cas.    273)  ;  Reefs  v.  Twiss,  1895,  2  Ir.  207,  248, 
Components    Tube    Co.    v.    Naylor,  249.     (See,  however,  pages  282  and 
1900,  2  Ir.  R.  1,  44;  Arkwright  v.  269  of  same  case),  affirmed,   1896, 
Newbold,  L.  R.  17  Ch.  Div.  301,  317,  App.  Cas.  273 ;  Cover's  Case,  L.  R. 
320.  1  Ch.  Div.  182,  199. 

Some  authorities,  overlooking  this          68.  1900,  2  Ir.  R.  1. 


FALSE  REPRESENTATIONS.  38J 

that  laid  down  in  The  New  Brunswick  and  Canada  Railway  Com- 
pany v.  Muggeridge,69  and  The  Central  Railway  Company  of 
Vene?.uela  v.  Kisch ;  70  but — 

2.  That,  where  the  question  is  not  the  right  of  rescission,  but 
is  the  right  to  damages  for  deceit,  evidence  must  be  given  of  active 
fraudulent    misrepresentation,    and    that    mere    concealment,    al- 
though fraudulent,  is  not  sufficient ;  but — 

3.  That  this  second  rule,  as  applicable  to  an  action  for  deceit, 
is  subject  to  this  explanation,  that  omissions  may,  upon  the  con- 
struction of  the  entire  document,  render  false  a  statement  which 
would  have  been  true  had  the  omitted  statement  been  contained 
in  the  document ;  and  that,  where  the  omission  is  of  this  character, 
the  deceived  party  has  a  right  not  only  to  rescind  the  contract, 
which  he  would  have  been  entitled  to  do  even  had  the  representa- 
tion not  been  of  this  character,  but  in  addition  he  can  treat  it  as 
active  misrepresentation,  as  distinguished  from  mere  concealment, 
and  therefore  make  it  the  ground  of  an  action  for  damages  for 
deceit — an  action  which  mere  concealment  would  not  be  sufficient 
to  maintain." 

This  is  no  doubt  a  correct  statement  of  the  result  of  the  Eng- 
lish cases.  It  is,  however,  suggested  that  a  broader  rule  of  lia- 
bility for  fraudulent  concealment  should  be  enforced  against  pro- 
moters of  corporations.  The  difficulty  of  imposing  a  liability  for 
fraud  and  deceit  because  of  a  failure  to  disclose  material  facts, 
where  the  parties  deal  at  arm's  length,  is  that  a  party  under  no 
obligation  to  speak  cannot  be  held  liable  because  of  his  silence. 
A  promoter  stands,  however,  in  a  fiduciary  relation  to  the  sub- 
scribers for  the  shares  of  the  corporation,  and  it  is  his  duty  to 
disclose  every  fact  within  his  knowledge  the  existence  of  which 
may  in  any  degree  affect  the  extent  or  quality  of  the  advantages 
held  out  as  an  inducement,71  and  there  is  no  reason  why  he  should 

69.  See  note  63.  Thannhauser,  45  Fed.  Rep.  730,  739, 

70.  See  note  64.  and    cases    cited;     Dickerman     v. 

71.  Federal.— C  o  r  t  e s     Co.      v.      Northern  Trust  Co.,  176  U.  S.  181, 


388 


THE  LAW  OF  PROMOTERS. 


not  be  held  liable  in  an  action  for  damages  for  fraud  and  deceit 
in  any  case  in  which  it  appears,  either  by  direct  proof  or  by 
fair  inference,  that  material  facts  within  his  knowledge  were  con- 
cealed with  intent  to  deceive — that  is,  with  intent  that  the  sub- 
scription should  be  made  in  ignorance  thereof — and  that  the 
subscriber  was,  by  the  failure  to  disclose  the  facts,  deceived  to  his 
damage.  This  is  probably  the  rule  in  some  jurisdictions.72 


204,  20  Sup.  Ct.  311,  44  L.  Ed.  423, 
quoting  from  Morawetz  on  Corpora- 
tions, (2nd  Ed.),  §  546;  Wiser  v. 
Lawler,  189  U.  S.  260,  264-265,  47 
L.  Ed.  802,  23  S.  C.  624 ;  DeKlotz  v. 
Broussard,  203  Fed.  Rep.  942,  122 
C.  C.  A.  244;  Hitchcock  v.  Hustace, 
14  Hawaii  232,  242. 

Illinois. — Goedwin  v.  Wilbur,  104 
111.  App.  45,  52. 

Maryland. — Findlay  v.  Baltimore 
Trust  &  Guarantee  Co.,  97  Md.  716, 
55  Atl.  379 ;  Hambleton  v.  Rhind,  84 
Md.  456,  488,  36  Atl.  597,  40  L.  R. 
A.  216,  231. 

Michigan. — Torrey  v.  Toledo 
Portland  Cement  Co.,  158  Mich.  348, 
122  N.  W.  614. 

New  York. — Morgan  v.  Skiddy,  62 
N.  Y.  319,  326. 

Virginia. — Virginia  Land  Co.  v. 
Haupt,  90  Va.  533,  19  S.  E.  168,  44 
Am.  St.  Rep.  939. 

Washington. — Johns  v.  Coffee,  74 
Wash.  189,  198,  133  Pac.  4,  affirmed 
on  reargument,  77  Wash.  700,  137 
Pac.  808. 

United  Kingdom  and  Colonies. — 
Lagunas  Nitrate  Co.  v.  Lagunas 
Syndicate,  1899,  2  Ch.  Div.  392,  409 ; 
Bagnall  v.  Carlton,  L.  R.  6  Ch.  Div. 
371,  383;  Directors  of  Central  Ry. 
Co.  of  Venezuela  v.  Kisch,  L.  R.  2 
H.  L.  99,  113,  16  L.  T.  N.  S. 


500;  Askew's  Case,  22  Weekly  Rep. 
762,  reversed  on  other  'grounds,  L. 
R.  9  Ch.  App.  664;  New  Brunswick 
&  Can.  Ry.,  etc.,  Co.  v.  Muggeridge, 
I  Dr.  &  Sm.  363,  381-382. 

72.  Federal. — Wiser  v.  Lawler, 
189  U.  S.  260,  264-265,  47  L.  Ed. 
802,  23  S.  C.  624. 

Illinois. — Goodwin  v.  Wilbur,  104 
111.  App.  45,  52. 

Iowa. — Caffee  v.  Berkley,  141 
Iowa  344,  349,  118  N.  W.  267,  269. 

Michigan. — Fred  Macey  Co.  v. 
Macey,  143  Mich.  138,  153,  106  N. 
W.  722,  727-728,  5  L.  R.  A.  N.  S. 
1036;  Torrey  v.  Toledo  Portland 
Cement  Co.,  158  Mich.  348,  122  N. 
W.  614. 

New  York Downey  v.  Finucane, 

205  N.  Y.  251,  98  N.  E.  391,  40  L.  R. 
A.  N.  S.  307;  Walker  v.  Anglo  Am. 
Mtge.  &  Trust  Co.,  72  Hun  334,  341, 
55  St.  Rep.  54,  25  Supp.  432.  And 
see  Morgan  v.  Skiddy,  62  N.  Y.  319, 
326. 

Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  77,  96  Pac.  528,  531, 
citing  14  Am.  &  Eng.  Encyc.  of 
Law  (2nd  Ed.)  78. 

See  post,  §§  232-233. 

See  note  to  Cottrill  v.  Krum,  18 
Am.  St.  Rep.  549,  556.  The  cases 
there  cited  are,  however,  of  doubt- 
ful authority. 


FALSE  REPRESENTATIONS.  389 

An  innocent  omission  can  in  no  event  be  made  the  basis  of  an 
action  of  fraud.73  The  fact  that  the  promoters  were  advised  by 
counsel  that  a  particular  matter  need  not  be  disclosed  does  not, 
however,  necessarily  save  them  from  liability.74 

§  211.  The  same  subject. — The  English  Companies  Act. 

The  question  of  the  liability  of  promoters  for  fraud  and  deceit 
because  of  their  omission  to  disclose  material  facts  is,  in  England, 
to  a  large  extent  controlled  by  statute.  The  English  Companies 
Act  of  1908  75  provides : 

"  81. — (1)   Every  prospectus  issued  by  or  on  behalf  of  a  com- 
pany, or  by  or  on  behalf  of  any  person  who  is  or  has  been  engaged 
or  interested  in  the  formation  of  the  company,  must  state — 
(a)   the  contents  of  the  memorandum,  with  the  names, 
descriptions,  and  addresses  of  the  signatories,  and 
the  number  of  shares  subscribed  for  by  them  respec- 
tively ;  and  the  number  of  founders  or  management 

73.  See  Cazeaux  v.  Mali,  25  Barb,  paragraph    "  K  "    of    subdivision    1 
(N.  Y.)   578,  584;  Aaron's  Reefs  v.  of   §   81  of  the  act  of  1908  are  to 
Twiss,  1896,  App.  Cas.  273,  287,  and  some   extent    taken   from    the   pro- 
see  ante,  §§  207-208.  visions    of    the    Companies    Act    of 

74.  Broome  v.  Speak,  1903,  1  Ch.  1867,    (Stat.   of   1867,  Chap.   131,   § 
Div.  586,  603,  618,  619,  620,  affirmed,  38).     The  following  authorities  In- 
«M&    now.     Shepheard    v.    Broome,  terpreting  the  earlier  statutes  have 
1904,    App.    Cas.    342;    Cackett    v.  some  bearing  upon  the  construction 
Keswick,  1902,  2  Ch.  Div.  456,  462.  of  the  present  act. 

And  see  ante,  §  207,  notes  36  and  The  statute  creates  a  new  cause 

47.  of  action  by  making  mere  omissions 

75.  Stat.  8,  Edw.  VII.,  Chap.  69,  the   basis  of  an   action  for  fraud. 
§    81,    et    seq.      See    also    Revised  Cackett  v.  Keswick,  1902,  2  Ch.  Div. 
Statutes  of  Canada,  1906,  Chap.  79,  456,  463. 

§  43.  It  is  not,  in  order  to  recover  under 

These  provisions  of  subdivision  1  the  statute  because  of  the  non-dis- 

of  §  81  are  taken  without  substantial  closure    of   a    fact    required    to    be 

change  from  the  act  of  1907,  (Stat.  disclosed,     necessary     to     prove     a 

of  1907,  Chap.  50,  §  2),  which  sub-  fraudulent  intent.    Macleay  v.  Tait, 

stantially  amended  the  act  of  1900,  1906,  App.  Cas.  24,  29,  75  L.  J.  Ch. 

(Stat.  of  1900,  Chap.  48,  §  10,  Sub-  N.    S.    90;    Shepheard    v.    Broome, 

division     1).      The     provisions     of  1904,     App.     Cas.     342,     affirming, 


390 


THE  LAW.  OF  PROMOTERS. 


or  deferred  shares,  if  any,  and  the  nature  and  ex- 
tent of  the  interest  of  the  holders  in  the  property 
and  profits  of  the  company ;  and 

(b)  the  number  of  shares,  if  any,  fixed  by  the  articles  as 
the  qualification  of  a  director,  and  any  provision  in 
the  articles  as  to  the  remuneration  of  the  directors ; 
and 

(c)  the  names,  descriptions,  and  addresses  of  the  direct- 
ors or  proposed  directors ;  and  « 

(d)  the  minimum  subscription  on  which  the  directors 
may  proceed  to  allotment,  and  the  amount  payable 
on  application  and  allotment  on  each  share ;  and  in 
the  case  of  a  second  or  subsequent  offer  of  shares, 
the  amount  offered  for  subscription  on  each  previous 


Broome  v.  Speak,  1903,  1  Ch.  Div. 
586;  Watts  v.  Bucknall,  1903,  1  Ch. 
Div.  766,  773,  affirming,  1902,  2  Ch. 
Div.  628;  Twycross  v.  Grant,  L.  R. 
2  C.  P.  D.  469;  Calthorpe  v.  Trech- 
mann,  1906  App.  Gas.  24,  75  L.  J.  Ch. 
N.  S.  90,  94  L.  T.  N.  S.  68,  22  Times 
Law  Rep.  149. 

The  fact  that  the  defendant 
honestly  believed  that  the  statute 
did  not  apply  to  the  particular  con- 
tract does  not  protect  him  from 
liability.  Calthorpe  v.  Trechmann, 
1906  App.  Gas.  24,  75  L.  J.  Ch.  N.  S. 
90,  94  L.  T.  N.  S.  68,  22  Times  Law 
Rep.  149;  Twycross  v.  Grant,  L.  R. 
2  C.  P.  D.  469;  Shepheard  v. 
Broome,  1904,  App.  Gas.  342. 

The  statute  extends,  but  does  not 
in  any  way  limit,  the  common  law 
liability  of  the  parties  responsible 
for  the  prospectus.  Aaron's  Reefs 
v.  Twiss,  1896,  App.  Gas.  273;  Ark- 
wright  v.  Newbold,  L.  R.  17  Ch.  Div. 
301. 


It  is  held  that  one  cannot  be  held 
liable  because  of  a  prospectus  issued 
without  his  authority,  and  subse- 
quently ratified  by  him.  Hoole  v. 
Speak,  1904,  2  Ch.  Div.  732. 

The  plaintiff  must  show  that  the 
prospectus  was  "  knowingly  is- 
sued "  by  the  defendant.  Calthorpe 
v.  Trechmann,  1906,  App.  Gas.  24,  75 
L.  J.  Ch.  N.  S.  90,  94  L.  T.  N.  S.  68, 
22  Times  Law  Rep.  149;  Charlton 
v.  Hay,  31  L.  T.  N.  S.  437;  Stevens 
v.  Hoare,  20  Times  Law  Rep.  407, 
409. 

A  failure  to  comply  with  the 
terms  of  the  statute  gives  rise  to 
an  action  for  damages  against  the 
persons  responsible  for  the  pro- 
spectus. (In  re  South  of  England 
Natural  Gas.,  etc.,  Co.,  Ltd.,  1911, 

1  Ch.  Div.  573,  80  L.  J.  Ch.  N.  S. 
358;     Cackett     v.     Keswick,     1902, 

2  Ch.    Div.    456;    Macleay    v.   Tait, 
1906,  App.  Gas.  24,  75  L.  J.  Ch.  N. 
S.  90;   Shepheard  v.   Broome,  1904, 


FALSE  REPRESENTATIONS. 


391 


allotment  made  within  the  two  preceding  years,  and 
the  amount  actually  allotted,  and  the  amount,  if 
any,  paid  on  the  shares  so  allotted;  and 

(e)  the  number  and  amount  of  shares  and  debentures 
which  within  the  two  preceding  years  have  been  is- 
sued, or  agreed  to  be  issued,  as  fully  or  partly  paid 
up  otherwise  than  in  cash,  and  in  the  latter  case  the 
extent  to  which  they  are  so  paid  up,  and  in  either 
case  the  consideration   for  which  those   shares  or 
debentures  have  been  issued  or  are  proposed  or  in- 
tended to  be  issued ;  and 

(f)  the  names  and  addresses  of  the  vendors  of  any  prop- 
erty purchased  or  acquired  by  the  company,  or  pro- 
posed so  to  be  purchased  or  acquired,  which  is  to  be 


App.  Gas.  342,  affirming,  Broome  v. 
Speak,  1903,  I  Ch.  Div.  586;  Watts 
v.  Bucknall,  1903,  1  Ch.  Div.  766, 
affirming,  1902,  2  Ch.  Div.  628;  Twy- 
cross  v.  Grant,  L.  R.  2  C.  P.  D.  469), 
but  does  not  entitle  the  subscribers 
to  rescind  their  subscriptions.  (In 
re  Wimbledon  Olympia,  Ltd.,  1910, 
1  Ch.  Div.  630 ;  In  re  South  of  Eng- 
land Natural  Gas,  etc.,  Co.,  Ltd., 
1911,  1  Ch.  Div.  573,  80  L.  J.  Ch.  N. 
S.  358 ;  Sullivan  v.  Mitcalf e,  L.  R.  5 
C.  P1.  D.  455,  465-466,  468;  Cover's 
Case,  L.  R.  1  Ch.  Div.  182,  affirm- 
ing, L.  R.  20  Eq.  114;  Components 
Tube  Co.  v.  Naylor,  1900,  2  Ir.  R.  1, 
53-54.  But  see  Askew's  Case, 
22  W.  R.  762,  reversed  on  other 
grounds,  L.  R.  9  Ch.  App.  664),  thus 
reversing  the  English  common  law 
rule  relating  to  the  omission  of 
material  facts.  See  ante,  §  210. 

The  "  prospectus  "  intended  by  the 
statute  is  that  document  offering 
shares  to  the  public,  upon  the 


strength  of  which  the  complainant 
actually  entered  his  subscription. 
Roussell  v.  Burnham,  1909,  1  Ch. 
Div.  127.  A  prospectus  not  issued 
to  the  public  is  not  within  the 
statute.  Baty  v.  Keswick,  85  L.  T. 
N.  S.  18,  W.  N.  1901,  167;  Sleigh  v. 
Glasgow  &  Transvaal  Options,  Ltd., 
Sess.  Gas.  6  Eraser  420.  The  statute 
applies  to  an  "  abridged  prospectus  " 
though  this  states  where  the  full 
prospectus  can  be  obtained,  and  the 
full  prospectus  refers  to  the  con- 
tract in  question.  White  v.  Hay- 
man,  1  Cab.  &  El.  101. 

The  act  of  1867  required  that  the 
prospectus  specify  the  dates  and  the 
names  of  the  parties  to  any  con- 
tract entered  into  by  the  company, 
or  the  promoters,  directors,  or  trus- 
tees thereof,  before  the  issue  of  such 
prospectus,  whether  the  contract 
was  subject  to  adoption  by  the  di- 
rectors, or  the  company  or  other- 
wise. (A  like  provision  is  contained 


392  THE  LAW  OF  PROMOTERS. 

paid  for  wholly  or  partly  out  of  the  proceeds  of  the 
issue  offered  for  subscription  by  the  prospectus, 
or  the  purchase  or  acquisition  of  which  has  not  been 
completed  at  the  date  of  issue  of  the  prospectus, 
and  the  amount  payable  in  cash,  shares,  or  de- 
bentures, to  the  vendor,  and  where  there  is  more 
than  one  separate  vendor,  or  the  company  is  a  sub- 
purchaser,  the  amount  so  payable  to  each  vendor: 
Provided  that  where  the  vendors  or  any  of  them  are 
a  firm  the  members  of  the  firm  shall  not  be  treated 
as  separate  vendors;  and 

(g)  the  amount  (if  any)  paid  or  payable  as  purchase 
money  in  cash,  shares,  or  debentures,  for  any  such 
property  as  aforesaid,  specifying  the  amount  (if 
any)  payable  for  goodwill;  and 

(h)  the  amount  (if  any)  paid  within  the  two  preceding 
years,  or  payable,  as  commission  for  subscribing  or 

in  the  Revised  Statutes  of  Canada,  Coats,  Ltd.,  v.  Crossland,  20  Times 

1906,  Ch.  79,   §  43).     Some  judges  Law    Rep.    800,    807;    Calthorpe   v. 

held   that  the  statute  required  the  Trechmann,  1906,  App.  Gas.  24,  75 

disclosure   of   only   those   contracts  L.  J.  Ch.  N.   S.  90,  94  L.  T.  N.   S. 

which  put  an  obligation  on  the  com-  68,  22  Times  Law  Rep.  149 ;  Chart- 

pany,  but  the  rule  generally  adopted  ton   v.    Hay,   31   L.   T.   N.    S.   437 ; 

was  that  the  statute  included  every  Stevens   v.    Hoare,    20   Times   Law 

contract    the    knowledge    of    which  Rep.  407.    These  cases  have,  because 

might  affect  a  reasonable  person  in  of    the    change    in    language,    little 

determining    whether    to    subscribe  bearing  upon  the  interpretation  of 

for  shares.     Sullivan  v.  Mitcalfe,  L.  the  act  of  1908. 

R.    5   C.    P.    D.    455;    Twycross    v.  The   statute   of   1867   applied    to 

Grant,  L.  R.  2  C.  P.  D.  469;  Cover's  oral   as   well  as  written  contracts. 

Case,  L.  R.  1  Ch.  Div.  182,  affirming,  Capel  &  Co.   v.    Sims'    Ships   Com- 

L.  R.  20  Eq.  114 ;  Craig  v.  Phillips,  positions  Co.,  57  L.  J.  Ch.  713. 

L.  R.  3  Ch.  Div.  722,  and  see  L.  R.  Compliance  with  the  act  of  1867 

7  Ch.  Div.  249 ;  Cornell  v.  Hay,  L.  might  be  effectively  waived  by  the 

R.  8  C.  P.  Cas.  328;  Greenwood  v.  parties.    Macleay  v.  Tait,  1906,  App. 

Leather    Shod   Wheel   Co.,    1900,    1  Cas.   24,    75   L.    J.    Ch.    N.    S.    90; 

Ch.  Div.  421,  437;  Cackett  v.  Kes-  Cackett    v.    Keswick,    1902,    2    Ch. 

wick,   1902,   2   Ch.   Div.   456;    Jury  Div.    456;    Greenwood    v.    Leather 

v.    Stoker,    L.    R    9   Ir.    385,    401;  Shod  Wheel  Co.,   1900,  1   Ch.   Div. 


FALSE  REPRESENTATIONS.  393 

agreeing  to  subscribe,  or  procuring  or  agreeing  to 
procure  subscriptions,  for  any  shares  in,  or  deben- 
tures of,  the  company,  or  the  rate  of  any  such  com- 
mission: Provided  that  it  shall  not  be  necessary  to 
state  the  commision  payable  to  sub-underwriters; 
and 

(i)  the  amount  or  estimated  amount  of  preliminary  ex- 
penses; and 

(j)  the  amount  paid  within  the  two  preceding  years  or 
intended  to  be  paid  to  any  promoter,  and  the  con- 
sideration for  any  such  payment;  and 

(k)  the  dates  of  and  parties  to  every  material  contract, 
and  a  reasonable  time  and  place  at  which  any  ma- 
terial contract  or  a  copy  thereof  may  be  inspected : 
Provided  that  this  requirement  shall  not  apply  to  a 
contract  entered  into  in  the  ordinary  course  of  the 
business  carried  on  or  intended  to  be  carried  on  by 
the  company,  or  to  any  contract  entered  into  more 
than  two  years  before  the  date  of  issue  of  the  pro- 
spectus; and 

(1)  the  names  and  addresses  of  the  auditors  (if  any)  of 
the  company;  and 

(m)  full  particulars  of  the  nature  and  extent  of  the  in- 
terest (if  any)  of  every  director  in  the  promotion 

421 ;  Watts  v.  Buckuall,  1903,  1  Ch.  prospectus  of  some  fact  by  the  stat- 

Div.  766,  affirming,  1902,  2  Ch.  Div.  ute  required  to  be  disclosed,  it  must 

628;  Calthorpe  v.  Trechmann,  1906,  be  proved  that  the  plaintiff  would 

App.  Cas.  24,  75  L.  J.  Ch.  N.  S.  90,  not  have  subscribed  had  he  known 

94   L.  T.  N.   S.  68,   22  Times  Law  the  truth,  or  else  that  the  matter 

Rep.    149;    Stevens    v.    Hoare,    20  withheld  was  such  that  if  disclosed 

Times  Law  Rep.  407.     Subdivision  it  would  reasonably  have  tended  to 

4  of  §  81  of  the  act  of  1908,  how-  deter     an     ordinarily    prudent    in- 

ever,  expressly  provides  tnat  such  a  vestor    from    applying    for    shares, 

waiver  is  void.  Shepheard  v.  Bray,  1906,  2  Ch.  Div. 

Before   a   subscriber   can   recover  235,  251,  et  seq.,  75  L.  J.  Ch.  N.  S. 

because  of  the  omission  from  the  633,  and  cases  cited,  (but  see  1907, 


394  THE  LAW  OF  PROMOTERS. 

of,  or  in  the  property  proposed  to  be  acquired  by, 
the  company,  or,  where  the  interest  of  such  a  di- 
rector consists  in  being  a  partner  in  a  firm,  the  na- 
ture and  extent  of  the  interest  of  the  firm,  with  a 
statement  of  all  sums  paid  or  agreed  to  be  paid  to 
him  or  to  the  firm  in  cash  or  shares  or  otherwise  by 
any  person  either  to  induce  him  to  become,  or  to 
qualify  him  as,  a  director,  or,  otherwise  for  services 
rendered  by  him  or  by  the  firm  in  connexion  with 
the  promotion  or  formation  of  the  company;  and 
(n)  where  the  company  is  a  company  having  shares  of 
more  than  one  class,  the  right  of  voting  at  meetings 
of  the  company  conferred  by  the  several  classes  of 
shares  respectively. 

(2)  For  the  purposes  of  this  section  every  person  shall  be 
deemed  to  be  a  vendor  who  has  entered  into  any  contract,  abso- 
lute or  conditional,  for  the  sale  or  purchase,  or  for  any  option  of 
purchase,  of  any  property  to  be  acquired  by  the  company,  in  any 
case  where — 

(a)  the  purchase  money  is  not  fully  paid  at  the  date  of 
issue  of  the  prospectus ;  or 

(b)  the  purchase  money  is  to  be  paid  or  satisfied  wholly 
or  in  part  out  of  the  proceeds  of  the  issue  offered 
for  subscription  by  the  prospectus ;  or 

2  Ch.  Div.  571,  76  L.  J.  Ch.  N.   S.  L.  R.  5  G.  P.  D.  455,  460;  Calthorpe 

692)  ;    Macleay   v.   Tait,   1906,   App.  v.   Trechmann,   1906,   App.   Gas.   24, 

Cas.  24,  75  L.  J.  Ch.  N.  S.  90,  and  75  L.  J.  Ch.  N.  S.  90,  94  L.  T.  N.  S. 

cases     cited ;     Nash    v.     Calthorpe,  68,  22  Times  Law  Rep.  149 ;  Stevens 

1905,    2    Ch.    Div.    237;    Broome    v.  v.  Hoare,  20  Times  Law  Rep.  407; 

Speak,    1903,    1    Ch.    Div.    586,    af-  Marshall  v.  Morrison,  1907,  Weekly 

firmed,     sub     nom.     Shepheard     v.  Notes  29. 

Broome,  1904,  App.  Cas.  342 ;  Cack-          The    omission    to    specify    a    con- 

ett    v.    Keswick,    1902,    2   Ch.    Div.  tract  is,  pf  course,  immaterial  if  the 

456,  463-464;   Baty  v.  Keswick,  85  plaintiff  had  in  fact  notice  thereof. 

L.  T.  N.  S.  18;  Sullivan  v.  Mitcalfe,  Stevens    v.    Hoare,   20   Times   Law 

Rep.  407. 


FALSE  REPRESENTATIONS.  395 

(c)    the  contract  depends  for  its  validity  or  fulfilment  on 
the  result  of  that  issue. 

(3)  Where  any  of  the  property  to  be  acquired  by  the  company 
is  to  be  taken  on  lease,  this  section  shall  apply  as  if  the  expression 
"  vendor "    included    the    lessor,    and    the    expression    "  purchase 
money  "  included  the  consideration  for  the  lease,  and  the  expres- 
sion "  sub-purchaser  "  included  a  sub-lessee. 

(4)  Any  condition  requiring  or  binding  any  applicant  for  shares 
or  debentures  to  waive  compliance  with  any  requirement  of  this 
section,  or  purporting  to  affect  him  with  notice  of  any  contract, 
document,  or  matter  not  specifically  referred  to  in  the  prospectus, 
shall  be  void. 

(5)  Where  any  such  prospectus  as  is  mentioned  in  this  section 
is  published  as  a  newspaper  advertisement,  it  shall  not  be  neces- 
sary in  the  advertisement  to  specify  the  contents  of  the  memo- 
randum or  the  signatories  thereto,  and  the  number  of  shares  sub- 
scribed for  by  them. 

(6)  In  the  event  of  non-compliance  with  any  of  the  require- 
ments of  this  section,  a  director  or  other  person  responsible  for 
the  prospectus  shall  not  incur  any  liability  by  reason  of  the  non- 
compliance,  if  he  proves  that — 

(a)   as  regards  any  matter  not  disclosed,  he  was  not  cog- 
nisant thereof ;  or 

It   was  held   both   under  the  act  the  act  of  1867  that  if  the  promoter 

of  1867  and  under  the  act  of  1900  sold     to     the     company,     property 

that  if  the  name  of  the  vendor  of  which    he   acquired    before    he    be- 

property  purchased  by  the  company  came  its  promoter,  it  was  not  neces- 

and   the  amount  of   the  considera-  sary  to  disclose  the  contract  under 

tion  paid  to  him  was  disclosed  by  which    the    promoter    acquired    the 

the  prospectus,  it  was  not  necessary  property.      Cover's    Case,    L.    R.    1 

to  state  how,  when,  or  at  what  price  Ch.    Div.    182,    affirming,    L.    R.    20 

such  vendor  acquired  the  property.  Eq.  114;  Craig  v.  Phillips,  L.  R.  3 

Sullivan  v.  Mitcalfe,  L.  R.  5  C.  P.  Ch.  Div.  722. 

D.  455,  466-467 ;  Brookes  v.  Hansen,  See  the  notes  on  this  statute  in 

1906,  2  Ch.  Div.  129.  Lord     Halsbury's    "The    Laws    of 

It  seems  to  have  been  held  under  England,"  Vol.  V,  p.  123,  et  aeq. 


396  THE  LAW  OF  PROMOTERS. 

(b)   the  non-compliance  arose  from  an  honest  mistake  of 

fact  on  his  part: 

Provided  that  in  the  event  of  non-compliance  with  the  require- 
ments contained  in  paragraph  (m)  of  subsection  (1)  of  this  sec- 
tion no  director  or  other  person  shall  incur  any  liability  in  re- 
spect of  the  non-compliance  unless  it  be  proved  that  he  had 
knowledge  of  the  matters  not  disclosed. 

(7)  This   section  shall  not  apply  to  a  circular  or  notice  in- 
viting existing  members  or  debenture  holders  of  a.  company  to 
subscribe   either   for  shares   or  for  debentures  of  the  company, 
whether  with  or  without  the  right  to  renounce  in  favour  of  other 
persons,  but  subject  as  aforesaid,  this  section  shall  apply  to  any 
prospectus  whether  issued  on  or  with  reference  to  the  formation 
of  a  company  or  subsequently. 

(8)  The  requirements  of  this  section  as  to  the  memorandum 
and  the  qualification,  remuneration,  and  interest  of  directors,  the 
names,  descriptions,  and  addresses  of  directors  or  proposed  direct- 
ors, and  the  amount  or  estimated  amount  of  preliminary  expenses, 
shall  not  apply  in  the  case  of  a  prospectus  issued  more  than  one 
year  after  the  date  at  which  the  company  is  entitled  to  commence 
business.  t 

(9)  Nothing  in  this  section  shall  limit  or  diminish  any  liability 
which  any  person  may  incur  under  the  general  law  or  this  Act 
apart  from  this  section. 

"  82. — (1)  A  company  which  does  not  issue  a  prospectus  on  or 
with  reference  to  its  formation,  shall  not  allot  any  of  its  shares 
or  debentures  unless  before  the  first  allotment  of  either  shares 
or  debentures  there  has  been  filed  with  the  registrar  of  companies 
a  statement  in  lieu  of  prospectus  signed  by  every  person  who  is 
named  therein  as  a  director  or  a  proposed  director  of  the  company 
or  by  his  agent  authorised  in  writing,  in  the  form  and  containing 
the  particulars  set  out  in  the  Second  Schedule  to  this  Act.75a 

75a.  For  a  case  involving  the  con-  statute,  see  In  re  Blair  Open  Hearth 
struction  of  this  section  of  the  Furnace  Co.,  Ltd.,  L.  R.  1914,  1  Ch. 


FALSE  REPRESENTATIONS. 


397 


This  section  shall  not  apply  to  a  private  company  or  to  a 
company  which  has  allotted  any  shares  or  debentures  before  the 
first  day  of  July  nineteen  hundred  and  eight." 

§  212.  Materiality  of  representations. 

A  misrepresentation  or  concealment  must,  to  be  actionable,  re- 
late to  some  material  fact.76  The  materiality  of  a  matter  mis- 
represented or  c6ncealed  is  to  be  determined  by  the  court  or  jury 
as  the  case  may  be,  and  the  circumstance  that  the  defendant  did 
not  consider  the  matter  of  any  importance  will  not  relieve  him 
from  responsibility.77 

Any  facts  substantially  affecting  the  financial  condition  of  the 
company,  properties  owned  or  to  be  acquired  by  it,  contracts  made 
or  to  be  made  by  it,  and  any  other  facts  affecting  the  desirability 
of  the  shares  are  material  facts  which  may  become  the  subject  of 
an  actionable  misrepresentation.78 


Div.  390;   83  L.   J.  Ch.  N.   S.  313; 
109  L.  T.  N.  S.  839 ;  21  Manson  49. 

76.  Smith  v.  Chadwick,  L.  R.  20 
Ch.  Div.  27,  45-46,  76-77,  46  L.  T. 
N.    S.   702,   affirmed,   L.   R.   9   App. 
Gas.  187,  5  Am.  &  Eng.  Corp.  Gas. 
23;  see  Directors  of  Central  Ry.  of 
Venezuela  v.  Kisch,  L.  R.  2  H.  L. 
99,  114,  et  seq.,  16  L.  T.  N.  S.  500. 

See  note  to  Cottrill  v.  Krum,  18 
Am.  St.  Rep.  549,  559. 

77.  Peek  v.  Gurney,  L.  R.  13  Eq. 
79,  111,  et  seq.,  affirmed,  L.   R.  6 
H.  L.  377. 

The  materiality  of  a  misrepre- 
sentation is  held  to  be  a  question 
of  law  in  Caswell  v.  Hunton,  87 
Me.  277,  32  Atl.  899. 

78.  Illustrative  cases  are: 
Connecticut. — Shelton    v.     Healy, 

74  Conn.  265,  50  Atl.  742. 
Indiana. — Grover    v.    Cavanaugh, 


40  Ind.  App.  340,  82  N.  E.  104. 

Iowa. — Coles  v.  Kennedy,  81  Iowa 
360,  46  N.  W.  1088,  25  Am.  St.  Rep. 
503. 

Maryland. — DuPuy  v.  Transpor- 
tation &  Terminal  Co.,  82  Md.  408, 
33  Atl.  889,  34  Atl.  910. 

Massachusetts. — Bradley  v.  Poole, 
98  Mass.  169,  93  Am.  Dec.  144; 
Walker  v.  Russell,  186  Mass.  69,  71 
N.  E.  86,  1  Am.  &  Eng.  Ann.  Cas. 
688. 

Mississippi. — Walker  v.  Mobile  & 
Ohio  R.  R.  Co.,  34  Miss.  245 ;  Selma 
M.  &  M.  R.  R.  Co.  v.  Anderson,  51 
Miss.  829. 

Missouri. — Hess  v.  Draffen,  99 
Mo.  App.  580,  74  S.  W.  440. 

New  Jersey. — Vreeland  v.  New 
Jersey  Stone  Co.,  29  N.  J.  Eq.  188, 
and  cases  cited,  affirmed,  29  N.  J. 
Eq.  651. 


398 


THE  LAW  OF  PROMOTERS. 


§  213.  Materiality  of  concealment  of  mortgage. 

The  court  in  Petrie  v.  Guelph  Lumber  Co.79  seems  to  have  held 
that  the  concealment  of  the  fact  that  the  property  of  the  corpora- 
tion is  subject  to  a  mortgage  is  immaterial  if  the  existence  of  the 
debt  secured  by  the  mortgage  is  made  known.  The  court  reasons 


New  York. — Downey  v.  Finucane, 
205  N.  Y.  251,  98  N.  E.  391,  40  L. 
R.  A.  N.  S.  307,  affirming,  146  N. 
Y.  App.  Div.  209,  130  Supp.  988; 
Townsend  v.  Felthousen,  156  N.  Y. 
618,  51  N.  E.  279. 

United  Kingdom  and  Colonies. — 
Directors  of  Central  Railway  of 
Venezuela  v.  Kisch,  L.  R.  2  H.  L. 
99,  114,  et  seq.,  16  L.  T.  N.  S.  500; 
Lagunas  Nitrate  Co.  v.  Lagunas 
Syndicate,  1899,  2  Ch.  Div.  392, 
429-431;  Hallows  v.  Fernie,  L.  R. 
3  Ch.  App.  467,  475 ;  Smith  v.  Chad- 
wick,  L.  R.  9  App.  Gas.  187,  5  Am. 
&  Eng.  Corp.  Gas.  23,  affirming, 
L.  R.  20  Ch.  Div.  27,  46  L.  T.  N.  S. 
702 ;  New  Brunswick  &  Canada  Ry., 
etc.,  Co.  v.  Muggeridge,  1  Drewry  & 
Smale  363,  381,  382 ;  Ross  v.  Estates 
Investment  Co.,  L.  R.  3  Eq.  122,  af- 
firmed, L.  R.  3  Ch.  App.  682;  Grid- 
land  v.  DeMauley,  1  DeG.  &  Sin. 
459 ;  Smith's  Case,  L.  R.  2  Ch.  App. 
604  affirmed,  sub  nom.  Reese  River 
Silver  Mining  Co.  v.  Smith,  L.  R.  4 
H.  L.  64;  Aaron's  Reefs  v.  Twiss, 
1896,  App.  Gas.  273;  Broome  v. 
Speak,  1903,  1  Ch.  Div.  586,  af- 
firmed, sub  nom.  Shepheard  v. 
Broome,  1904,  App.  Cas.  342;  Car- 
gill  v.  Bower,  L.  R.  10  Ch.  Div.  502 ; 
Chester  v.  Spargo,  18  L.  T.  N.  S. 
314;  Knox  v.  Hayman,  67  L.  T.  N. 
S.  137. 


And  see  note  to  Lomita  Land  & 
Water  Co.  v.  Robinson,  18  L.  R.  A. 
N.  S.  1106,  1109,  and  note  to  Fear 
v.  Bartlett,  33  L.  R.  A.  721,  736-738. 

The  concealment  of  the  fact  that 
calls  upon  the  shares  have  already 
been  made,  and  that  the  subscriber 
will  upon  entering  his  subscription 
immediately  become  liable  therefor, 
has  been  held  sufficient  to  justify 
a  rescission  of  the  subscription. 
Brigg's  Case,  19  L.  T.  N.  S.  758. 

As  to  misstatements  of  matters 
of  law,  see  Eaglesfield  v.  Marquis 
of  Londonderry,  L.  R.  4  Ch.  Div. 
693,  affirmed,  38  L.  T.  N.  S.  303. 
See  also  note  to  Fargo  G.  &  C. 
Co.  v.  Fargo  G.  &  E.  Co.,  37  L.  R. 
A.  605. 

As  to  misrepresentations  of  for- 
eign law,  see  Epp  v.  Hinton,  53  L. 
R.  A.  N.  S.  675,  and  cases  cited  in 
note. 

"  The  disposition  at  the  present 
day  is  to  hold  directors  of  corpora- 
tions to  a  strict  accountability  for 
false  statements  made  for  the  pur- 
pose of  inducing  the  public  to  pur- 
chase stocks  at  much  more  than 
their  real  value."  Van  Slochem  v. 
Villard,  154  N.  Y.  App.  Div.  161, 
138  Supp.  852,  affirmed,  207  N.  Y. 
587,  101  N.  E.  467. 

79.  11  Can.  Sup.  Ct.  450,  482,  15 
Am.  &  Eng.  Corp.  Cas.  487.  See 
post,  §  231. 


FALSE  REPRESENTATIONS. 


399 


that  the  corporation  would  in  any  event  have  to  pay  the  debt, 
apparently  losing  sight  of  the  fact  that  the  corporation  could  be 
much  more  readily  financed  if  its  property  were  unincumbered, 
and  that  the  existence  of  the  mortgage  is  for  that  reason  material. 

§  214.  Materiality  of  representations  as  to  promoter's  profits. 

While  a  promoter  selling  his  own  property  to  the  company 
need  not,  if  fairly  disclosing  his  interest  in  the  transaction,  dis- 
close the  cost  of  the  property  to  him,80  a  false  statement  by  the 
promoter  as  to  the  price  paid  by  him  for  the  property,  is  a  mis- 
statement  of  a  material  fact  which  may  become  the  subject  of 
an  action  for  fraud  and  deceit.81  A  misstatement,  in  the  deed  by 


80.  Re  Christineville  Rubber  Es- 
tates, Ltd.,  106  L.  T.  N.  S.  260,  81 
L.  J.  Ch.  N.  S.  63.     See  also  ante, 
§  115. 

81.  Federal. — Cortes      Co.      v. 
Thannhauser,  45  Fed.  Rep.  730,  739. 

Alabama. — Alabama  Foundry  & 
Mach.  Works  v.  Dallas,  127  Ala. 
513,  29  So.  459. 

California. — Burbank  v.  Dennis, 
101  Cal.  90,  100,  35  Pac.  444,  447- 
448;  Ex-Mission  Land  &  Water  Co. 
v.  Flash,  97  Cal.  610,  32  Pac.  600. 

Iowa Teachout  v.  Van  Hoesen, 

76  Iowa  113,  118,  40  N.  W.  96,  98, 
1  L.  R.  A.  664;  Hunter  v.  French 
League  Safety  Cure  Co.,  96  Iowa 
573,  65  N.  W.  828. 

Maryland. — McAleer  v.  Horsey, 
35  Md.  439. 

Michigan. — Stoney  Creek  Woolen 
Co.  v.  Smalley,  111  Mich.  321,  69 
N.  W.  722. 

Missouri. — Hess  v.  Draffen,  99 
Mo.  App.  580,  74  S.  W.  440 ;  Garrett 
v.  Wannfried,  67  Mo.  App.  437. 

New  Jersey. — Woodbury   Heights 


Land  Co.  v.  Loudenslager,  55  N.  J. 
Eq.  78,  89,  35  Atl.  436,  affirmed,  56 
N.  J.  Eq,  411,  41  Atl.  1115,  but 
modified,  58  N.  J.  Eq.  556,  43  Atl. 
671. 

New  York. — Getty  v.  Devlin,  54 
N.  Y.  403;  Sandford  v.  Handy,  23 
Wend.  260;  Van  Slochem  v.  Villard, 
207  N.  Y.  587,  101  N.  E.  467. 

Ohio. — Shawnee  Commercial  & 
Savings  Bank  Co.  v.  Miller,  24 
Ohio  C.  C.  198,  212,  et  seq. 

Pennsylvania. — Simons  v.  Vulcan 
Oil  &  Mining  Co.,  61  Pa.  202,  221, 
100  Am.  Dec.  628 ;  Burns  v.  McCabe, 
72  Pa.  309. 

Wisconsin. — Franey  v.  Warner, 
96  Wis.  222,  71  N.  W.  81;  Fountain 
Spring  Park  Co.  v.  Roberts,  92  Wis. 
345,  66  N.  W.  399,  53  Am.  St.  Rep. 
917. 

United  Kingdom  and  Colonies. — 
Gluckstein  v.  Barnes,  1900,  App. 
Gas.  240,  247,  258 ;  Kent  v.  Freehold 
Land  &  Brickmaking  Co.,  L.  R.  4 
Eq.  588,  17  L.  T.  N.  S.  77,  reversed 
on  another  ground,  L.  R.  3  Ch.  App. 
493. 


400 


THE  LAW  OF  PROMOTERS. 


which  the  property  was  acquired  by  the  promoter,  of  the  con- 
sideration paid  therefor,  amounts  to  a  misrepresentation  of  the 
cost  of  the  property  and  may  give  rise  to  an  action  for  fraud.82  A 
false  statement  as  to  the  promoter's  profits  is  also  a  misrepre- 
sentation of  a  material  fact.83 

§  215.  Materiality  of  representations  as  to  promoter's  interest. 

The  promoter's  interest  in  the  corporation,  and  the  property 
to  be  acquired  by  it,  is  always  a  material  fact,  a  misstatement  of 
which  constitutes  an  actionable  misrepresentation. 

A  representation  that  the  company  is  acquiring  certain  prop- 
erty from  a  third  party,  is  a  misrepresentation  of  a  material  fact 
if  the  promoters  are  themselves  the  owners  of  the  property  and 
the  real  vendors,84  or  have  acquired  control  of  the  property  by 
means  of  options.85 


See  also  ante,  §  117. 

As  to  misrepresentations  of  value 
as  actionable  frauds,  see  McAleer 
v.  Horsey,  35  Md.  439;  Ginn  v. 
Almy,  212  Mass.  486,  99  N.  E.  276; 
Busterud  v.  Farrington,  36  Minn. 
320,  31  N.  W.  360;  Hess  v.  Draffen, 
99  Mo.  App.  580,  74  S.  W.  440; 
Shawnee,  etc.,  Co.  v.  Miller,  24 
Ohio  C.  C.  198. 

For  cases  dealing  with  the  ques- 
tion whether  a  false  representation, 
made  by  a  vendor,  as  to  the  cost 
of  the  property  to  him,  is  in  general 
a  misrepresentation  of  a  material 
fact,  see  note  to  Kohl  v.  Taylor,  35 
L.  R.  A.  N.  S.  174,  also  cases  cited 
in  Teachout  v.  Van  Hoesen,  76 
Iowa  113,  118-119,  40  N.  W.  96,  99, 
1  L.  R.  A.  664,  in  Van  Slochem  v. 
Villard,  207  N.  Y.  587,  101  N.  E. 
467,  and  in  note  to  Cottrill  v.  Krum, 
18  Am.  St.  Rep.  549,  556-558. 

82.  Woodbury  Heights  Land  Co. 


v.  Loudenslager,  55  N.  J.  Eq.  78,  89, 
35  Atl.  436,  affirmed,  56  N.  J.  Eq. 
411,  41  Atl.  1115,  but  modified,  58 
N.  J.  Eq.  556,  43  Atl.  671. 

A  false  recital,  in  the  deed  to  the 
corporation,  of  the  price  paid  by  the 
promoters,  is  likewise  actionable. 
Hichens  v.  Congreve,  4  Russ.  562. 
So  also  is  a  false  receipt  given  by 
the  original  vendor  to  the  promoter. 
Stoney  Creek  Woolen  Co.  v.  Smal- 
ley,  111  Mich.  321,  69  N.  W.  722. 

83.  Urner  v.  Sollenberger,  89  Md. 
316,   330,   43   Atl.    810;    Seaman   v. 
Low,  4  Bosw.  (N.  Y.)  337.    And  see 
post,  §§  231,  232-233,  239. 

84.  Paddock   v.   Fletcher,   42   Vt. 
389. 

Franey  v.  Warner,  96  Wis.  222, 
235,  71  N.  W.  81,  85;  Hebgen  v. 
Koeffler,  97  Wis.  313,  320,  72  N.  W. 
745,  747-748. 

In  re  Leeds  &  Hanley  Theatres  of 
Varieties,  1902,  2  Ch.  Div.  809,  824, 


FALSE  REPRESENTATIONS. 


401 


A  representation  that  property  is  to  be  purchased  by  the  com- 
pany at  a  certain  price,  when  only  a  part  of  such  price  is  to  be 
paid  to  the  owners  and  the  residue  retained  by  the  promoters,  ia 
a  fraud  upon  the  corporation  and  the  subscribers  for  its  shares.86 

A  representation  that  property  sold  to  the  corporation  is  owned 
by  the  promoter  and  other  stockholders  named,  has  been  held 
fraudulent  where  the  fact  was  that  the  promoter  was  himself  the 
sole  owner  of  the  property.87 

A  false  representation  that  the  promoters  are  themselves  share- 
holders in  the  corporation  is  a  misrepresentation  of  a  material 
fact,88  but  a  failure  to  mention  the  fact  that  the  promoters 


828;  Clarke  v.  Dickson,  6  C.  B.  N. 
S.  453,  468;  New  Sombrero  Phos- 
phate Co.  v.  Erlanger,  L.  R.  5  Ch. 
Div.  73,  120,  25  W.  R.  436,  affirmed, 
L.  R.  3  App.  Gas.  1218,  6  Eng.  Rul. 
Gas.  777,  39  L.  T.  N.  S.  269,  27  W. 
R.  65;  Components  Tube  Co.  v. 
Naylor,  1900,  2  Ir.  R.  1,  60. 

As  to  admissibility  of  evidence 
that  promoters  in  dealing  through 
a  nominal  party,  instead  of  openly 
selling  to  the  corporation,  acted 
under  advice  of  counsel,  see  Com- 
ponents Tube  Co.  v.  Naylor,  1900, 
2  Ir.  R.  1,  73. 

85.  Virginia  Land  Co.   v.  Haupt, 
90  Va.  533,  19   S.   E.   168,  44  Am. 
St.  Rep.  939 ;  West  End  Real  Estate 
Co.  v.  Nash,  51  W.  Va.  341,  41  S. 
E.  182. 

86.  Federal. — Cortes      Co.      v. 
Thannhauser  45  Fed.  Rep.  730. 

Colorado. — Zang  v.  Adams,  23 
Colo.  408,  48  Pac.  509,  58  Am.  St. 
R.  249. 

Mississippi. — Selma  M.  &  M.  R. 
R.  Co.  v.  Anderson,  51  Miss.  829. 


Pennsylvania. — Short  v.  Steven- 
son, 63  Pa.  95. 

Texas. — Hall  v.  Grayson  County 
Nat'l  Bank,  36  Tex.  Civ.  App.  317, 
330,  81  S.  W.  762,  769. 

Virginia.— West  End  Real  Estate 
Co.  v.  Claiborne,  97  Va.  734,  34  S. 
E.  900. 

Wisconsin. — Fountain  Spring 
Park  Co.  v.  Roberts,  92  Wis.  345, 
66  N.  W.  399,  53  Am.  St.  Rep.  917. 

United  Kingdom  and  Colonies. — 
The  Lindsay  Petroleum  Co.  v.  Hurd, 
L.  R.  5  P.  C.  221;  Clarke  v.  Dick- 
son,  6  C.  B.  N.  S.  453 ;  Capel  &  Co. 
v.  Sim's  Ships  Composition  Co.,  57 
L.  J.  Ch.  N.  S.  713 ;  Smith  v.  Chad- 
wick,  L.  R.  20  Ch.  Div.  27,  55,  46 
L.  T.  N.  S.  702,  affirmed,  L.  R.  9 
App.  Gas.  187,  5  Am.  &  Eng.  Corp. 
Cas.  23. 

87.  Alabama    Foundry    &    Mach. 
Works   v.   Dallas,  127  Ala.  513,  29 
So.  459. 

88.  Shawnee  Commercial  &  Sav- 
ings Bank  Co.  v.  Miller,  24  Ohio  C. 
C.  198,  213. 


THE  LAW  OF  PROMOTERS. 


are  subscribing  for  shares  is  not  a  ground  for  the  rescission  of  a 
subscription  made  in  ignorance  thereof.89 

A  representation  that  the  promoters  are  putting  their  money 
into  the  enterprise  is  a  misrepresentation  of  a  material  fact  if  the 
promoters  are,  unknown  to  the  subscribers,  paying  for  their  shares 
by  a  transfer  of  property,90  or  are  because  of  any  other  circum- 
stance not  in  fact  risking  their  money  in  the  enterprise.91  If, 
however,  the  promoters  openly  sell  their  own  property  to  the  cor- 
poration and  at  the  same  time  subscribe  for  shares,  the  fact  that 
ihe  transaction  is  consummated  by  offsetting  the  subscription 
price  of  the  promoters'  shares  against  the  price  to  be  paid  for 
the  promoters'  property,  is  of  no  moment.92 

There  is  authority  for  the  proposition  that  promoters  falsely 
representing  that  they  have  subscribed  for  a  certain  number  of 
shares  may  be  compelled  to  make  their  representation  good,93 
but  the  better  rule  seems  to  be  that  a  representation  of  that  char- 


89.  Pulsford     v.     Richards,     17 
Beav.  87,  98. 

90.  Moore    v.     Warrior    Coal    & 
Land  Co.,  178  Ala.  234,  242,  59  So. 
219,  222,  Am.  &  Eng.  Ann.  Cas.  1915 
B.  173;  McAleer  v.  Horsey,  35  Md. 
439,  454,  et  seq.;  Nichols  v.  Buell, 
157  Mich.  609,  122  N.  W.  217 ;  Heck- 
scher  v.  Edenborn,  203  N.  Y.  210,  221, 
96  N.   E.  441,  reversing,  137  N.  Y. 
App.  Div.  899,  122  Supp.  1131,  which 
followed,  131  N.   Y.  App.  Div.  253, 
264,    115    Supp.    673;    Paddock    v. 
Fletcher,    42    Vt.    389;    Wilson    v. 
Hotchkiss,  2  Ont.  L.  R.  261,  affirmed, 
sub  nom.  Milburn  v.  Wilson,  31  Can. 
S.  C.  481. 

See  Walker  v.  Anglo-Am.  Mtge. 
&  Trust  Co.,  72  Hun  (N.  Y.)  334, 
55  St.  Rep.  54,  25  Supp.  432,  where 
the  promoters  paid  for  their  shares 


by  the  transfer  of  the  good  will  of 
the  business  taken  over  by  the  com- 
pany. 

91.  Cortes    Co.    v.    Thannhauser, 
45  Fed.  Rep.  730,  738-739;  Coulter 
v.    Clark,    160    Ind.    311,    66   N.    E. 
739 ;  Hinkley  v.  Sac  Oil  &  Pipe  Line 
Co.,  132  Iowa  396,  407,  107  N.  W. 
629,  633,  119  Am.  St.  Rep.  564. 

See  Hall  v.  Grayson  County  Nat'l 
Bank,  36  Tex.  Civ.  App.  317,  81  S. 
W.  762,  where  the  promoter  was, 
under  a  secret  agreement  with  the 
vendor,  partially  indemnified  against 
loss  on  his  subscription. 

92.  Richardson     v.     Graham,     45 
W.   Va.   134,  30   S.   E.  92,  and  see 
Heckscher   v.   Edenborn,   203  N.   Y. 
210,  224,  96  N.   E.  441. 

93.  Moore  &  De  La  Torre's  Case, 
L.  R.  18  Eq.  661.     See  also  post,  § 
234,  note  97. 


FALSE  REPRESENTATIONS.  403 

acter  does  not  constitute  any  contract  with  the  corporation,  and 
that  the  only  liability  of  the  promoters  is  a  liability  for  fraud 
to  the  persons  deceived  thereby.94 

Promoters  who  falsely  state  that  moneys  in  the  treasury  of  the 
corporation  represent  moneys  paid  by  them  on  account  of  their 
subscriptions,  may  be  estopped  from  afterwards  claiming  that 
such  moneys  were  loaned  to  the  corporation.95 

§  216.  Materiality  of  representations  as  ,to  identity  or  posi- 
tion of  persons  selling  property  to  corporation. 

A  statement  that  a  person  mentioned  by  name,  selling  property 
to  the  company  had  such  confidence  in  the  future  of  the  en- 
terprise that,  having  the  option  to  receive  a  part  of  the  purchase 
price  in  cash  or  in  shares,  he  had  elected  to  take  the  larger  part 
in  shares,  was  held  to  be  a  material  misrepresentation  where  the 
fact  was  that  the  person  named  was  a  mere  dummy  who  had  no 
interest  whatsoever  in  the  transaction,  and  that  the  promoter  was 
himself  the  real  owner  of  the  property  sold  to  the  corporation.96 

The  production  of  a  letter  recommending  the  purchase  by  the 
corporation  of  property  under  consideration,  stating  that  the 
investment  was  a  good  one  at  the  price  and  that  the  writer  would 
himself  have  purchased  the  property  had  he  known  that  it  could 
be  had  at  the  price,  was  held  to  constitute  an  actionable  fraud  in 
view  of  the  fact  that  the  writer  of  the  letter  was  himself  the  owner 
of  a  portion  of  the  property  mentioned,  and  that  the  price  quoted 
was  a  false  one  made  to  the  proposed  company  with  a  view  to  al- 
lowing the  promoter  to  secure  for  himself  a  substantial  advance 
over  the  actual  price  to  be  paid  to  the  owners.97 

94.  Moore  Bros.  &  Co.,  Ltd.,  1899,  96.  In  re  Leeds  &  Hanley  Thea- 
1  Ch.  Div.  627,  followed  in  Todd  v.  tres  of  Varieties,  1902,  2  Ch.  Div. 
Millen,   1910,    Sess.   Gas.    868.     See  809,  824,  828.     See  also  Components 
also   Haines   v.    Franklin,    87   Fed.  Tube  Co.  v.  Naylor,  1900,  2  Ir.  R.  1, 
Rep.  139.  31-32. 

95.  See  Spackman  v.  Lattimore,  3  97.  Lindsay     Petroleum     Co.     v. 
Giff.  16.  Kurd,  L.  R.  5  P.  C.  221. 


404 


THE  LAW  OF  PROMOTERS. 


A  statement  that  certain  reports  in  regard  to  the  property  to 
be  purchased  by  the  corporation,  had  been  prepared  for  the  di- 
rectors by  named  engineers  of  eminence  and  reputation,  when  such 
report  had  actually  been  prepared  for  the  owner  of  the  property 
or  his  agents,  cannot  be  held  a  misstatement  of  a  material  fact 
in  the  absence  of  proof  that  the  report  was  actually  untrue.98 
If  a  report  had  been  made  years  before  and  the  situation  had  in 
the  meantime  substantially  changed,  the  statement  that  the  re- 
port had  been  made  for  the  directors,  conveying  an  impression 
that  the  report  was  of  recent  date,  would  constitute  a  misrepre- 
sentations of  a  material  fact." 

§  217.  Materiality  of  representations  in  regard  to  directors. 

A  misrepresentation  as  to  the  personnel  of  the  board  of  direct- 
ors is  generally  held  to  be  a  misrepresentation  of  a  material  fact.1 


98.  Angus  v.  Clifford,  1891,  2  Ch. 
Div.  449,  468-469,  480-481. 

99.  See  Aaron's  Reefs  v.   Twiss, 
1896,  App.  Gas.  273,  282,  288. 

1.  DuPuy  v.  Transportation  Co., 
82  Md.  408,  33  Atl.  889,  34  Atl.  910; 
Wenstrom  Consol.  D.  &  M.  Co.  v. 
Purnell,  75  Md.  113,  122,  23  Atl.  134. 

Walker  v.  Anglo-Am.  Mortgage  & 
Trust  Co.,  72  Hun  (N.  Y.)  334,  55 
St.  R.  54,  25  Supp.  432. 

Smith  v.  Chadwick,  L.  R.  9  App. 
Gas.  187,  194,  5  Am.  &  Eng.  Corp. 
Gas.  23,  affirming,  L.  R.  20  Ch.  Div. 
27,  50,  68-69,  46  L.  T.  N.  S.  702; 
Ex  parte  Edwards,  64  L.  T.  N.  S. 
561;  Re  The  Land  Credit  Co.  of 
Ireland,  14  W.  R.  957 ;  Carew's  Case, 
7  DeG.  M.  &  G.  43,  49-50;  Re  The 
Life  Association  of  England,  Ltd., 
(Blake's  Case),  34  Beav.  639,  34  L. 
J.  Ch.  N.  S.  278,  13  W.  R.  486 ;  In  re 
Scottish  Petroleum  Co.,  L.  R.  23  Ch. 
Div.  413,  49  L.  T.  N.  S.  348,  31  W. 


R.  846 ;  In  re  Metropolitan  Coal  Con- 
sumers' Association,  (Wainwright's 
Case),  62  L.  T.  N.  S.  30,  59  L.  J. 
Ch.  N.  S.  281,  affirmed,  63  L.  T.  N. 
S.  429;  Elain  v.  Agar,  1  Sim.  37, 
5  L.  J.  Ch.  1;  In  re  Dunlop-Truf- 
fault  C.  &  T.  Mfg.  Co.,  Ltd.,  13 
Times  Law  Rep.  33;  Woolmer  v. 
Toby,  10  Q.  B.  691 ;  Re  Johannesburg 
Hotel  Co.,  Ltd.,  8  Ry.  &  Corp.  L.  J. 
197;  cf.  Mathew's  Case,  14  Jur.  928, 
3  DeG.  &  S.  234. 

See  note  to  Fear  v.  Bartlett,  33 
L  R.  A.  721,  733. 

In  re  Metropolitan  Coal  Con- 
sumers' Association,  ( Karberg's 
Case),  1892,  3  Ch.  Div.  1,  13,  16,  66 
L.  T.  N.  S.  700,  it  was  held  that  the 
inclusion  in  the  list  of  the  members 
of  the  council  of  administration  of 
the  names  of  Lord  Brabourne  and 
Admiral  Mayne  was  a  misrepresen- 
tation, these  gentlemen  having  be- 
fore any  prospectus  was  issued,  and 


FALSE  REPRESENTATIONS. 


405 


This  is,  however,  not  necessarily  so  in  every  case.  A  misstatement 
as  to  the  persons  who  are  to  constitute  the  board  of  directors 
cannot  be  considered  a  misstatement  of  a  material  fact  unless  the 
persons  named  were  known  to  the  plaintiff,  either  personally  or  by 
reputation,  in  such  manner  that  their  presence  upon  the  board 
of  directors  actually  affected  his  determination  to  subscribe  for 
shares.2 

The  board  of  directors  of  every  company  is  at  all  times  subject 
to  change,  and  the  fact  that  some  of  the  persons  upon  the  faith  of 
whose  presence  on  the  board  a  subscription  was  entered  resigned 
shortly  after  the  formation  of  the  company,  is  no  ground  for  re- 
scission. It  has,  however,  been  held  that  if  the  change  in  the 
directorate  is  made  before  the  allotment  a  dissatisfied  subscriber 
may  withdraw  his  subscription.3 


before  any  articles  of  association 
existed,  and  at  a  time  when  many 
matters  were  still*  to  be  settled,  ex- 
pressed their  willingness  to  become 
members  of  the  council,  but  not  hav- 
ing authorized  the  publication  of 
their  names  as  such  members,  and 
subsequently  refusing  to  serve.  See 
also  Wainwright's  Case,  62  L.  T.  N. 
S.  30,  59  L.  J.  Ch.  N.  S.  281,  af- 
firmed, 63  L.  T.  N.  S.  429. 

As  to  the  effect  of  misrepresenta- 
tions regarding  the  existence  of  an 
advisory  board,  see  American  Build- 
ing and  Loan  Assoc.  v.  Rainbolt,  48 
Neb.  434,  67  N.  W.  493;  same  v. 
Bear,  48  Neb.  455,  67  N.  W.  500. 

2.  Smith  v.  Chadwick,  L.  R.  9 
App.  Gas.  187,  194,  5  Am.  &  Eng. 
Corp.  Cas.  23,  affirming,  L.  R.  20 
Ch.  Div.  27,  50-51,  68-69,  46  L.  T. 
N.  S.  702. 

In  Carew's  Case,  7  DeGex.  M.  & 


G.  43,  49-50,  Lord  Justice  Knight 
Bruce  seems  to  have  held  that  a 
false  statement  as  to  the  persons 
who  are  to  be  directors  of  the  com- 
pany is  a  material  misrepresentation, 
because  it  is  impossible  to  be  cer- 
tain how  far  the  judgment  of  the 
subscribers  may  have  been  in- 
fluenced by  the  fact  of  particular 
persons  being  named  as  directors. 

3.  In  re  Scottish  Petroleum  Co., 
(Anderson's  Case),  L.  R.  17  Ch. 
Div.  373,  50  L.  J.  Ch.  N.  S.  269,  43 
L.  T.  N.  S.  723 ;  In  re  Scottish  Petro- 
leum Co.,  (Wallace's  Case),  L.  R. 
23  Ch.  Div.  413,  49  L.  T.  N.  S.  348, 
31  W.  R.  846;  Ex  parte  Brown,  95 
L.  T.  N.  S.  756. 

Cf.  Hallows  v.  Fernie,  L.  R.  3  Ch. 
App.  467,  472-473;  Ross  v.  Estates 
Investment  Co.,  L.  R.  3  Eq.  122,  133, 
affirmed,  L.  R.  3  Ch.  App.  682; 
Mathew's  Case,  14  Jur.  928,  3  DeG. 
&  S.  234. 


406  THE  LAW  OF  PROMOTERS. 

The  fact  that  the  board  of  directors  is  not  independent,  but 
subject  to  the  domination  of  the  promoters  or  of  persons  selling 
property  to  the  corporation,  is  a  material  fact  that  should  be  dis- 
closed to  the  subscribers.4  A  false  statement  that  the  directors 
are  themselves  taking  and  paying  for  shares  is  a  misstatement  of 
a  material  fact,5  as  is  likewise  any  misstatement  in  regard  to  the 
compensation  received  by  the  directors  in  consideration  of  their 
agreeing  to  act  as  such.6 

It  was  held  in  Cackett  v.  Keswick  7  that  where  a  well-known 
firm  of  merchants  had  agreed  to  act  as  commercial  agents,  and  one 
of  its  members  as  chairman  of  the  board  of  directors,  of  the  com- 
pany, there  should  in  fairness  have  been  disclosed  to  the  intending 
subscribers,  the  fact  that  this  firm  was  receiving  a  large  block  of 
stock  for  the  use  in  the  prospectus  of  its  name  and  that  of  the 
member  who  was  to  act  as  chairman. 

§  218.  Materiality    of    representations    in  regard  to  subscrip- 
tions. 

A  false  statement  as  to  the  number  of  shares  subscribed  or  paid 
for  is  a  misrepresentation  of  a  material  fact.8  A  representation 

4.  Erlanger     v.     New     Sombrero          7.  1902,  2  Ch.  Div.  456,  465,  473, 
Phosphate   Co.,   L.   R.   3  App.   Gas.      477. 

1218,  6  Eng.  Rul.  Cas.  777,  39  L.  T.  8.    Massachusetts. — Honsucle      v. 

N.    S.   269,  27  W.   R.   65,  affirming,  Ruffin,  172  Mass.  420,  52  N.  E.  538. 

New  Sombrero  Phosphate  Co.  v.  Er-  Missouri. — Ramsey    v.    Thompson 

langer,  L.  R.  5  Ch.  Div.  73,  25  W.  Mfg.  Co.,  116  Mo.  313,  22  S.  W.  719. 

R.   436 ;    Jury   v.    Stoker,   L.    R.    9  New  York. — Talmadge  v.  Sanitary 

Ir.  385,  400-401.  Security  Co.,  31  N.  Y.  App.  Div.  498, 

5.  Henderson  v.   Lacon,   L.   R.   5  52  Supp.  139. 

Eq.  249,  17  L.  T.  N.  S.  527 ;  Ex  parte  Ohio. — Nugent  v.  Cincinnati  H.  & 

Storey,  62  L.  T.  N.  S.  791.  I.  S.  L.  R.  R.  Co.,  2  Disney  302. 

6.  Arkwright   v.    Newbold,    L.    R.  Texas. — Commonwealth     Bonding 
17  Ch.  Div.  301,  309,  reversed,  on  &  Casualty  Ins.  Co.  v.  Cator,  —  Tex. 
appeal,   p.   316,  et   seq.;  Cornell  v.  Civ.  App.  — ,  175  S.  W.  1074. 

Hay,  L..  R.  8  C.  P.  328 ;  Heymann  v.          Wisconsin. — Luetzke    v.    Roberts, 
European  Central  Ry.  Co.,  L.  R.  7      130  Wis.  97,  109  N.  W.  949. 
Eq.  154. 


FALSE  REPRESENTATIONS. 


407 


that  a  certain  portion  of  the  share  capital  has  been  subscribed  for, 
is  fraudulent  if  the  subscription  referred  to  was  in  fact  made  by 
one  of  the  promoters  upon  the  understanding  that  he  should  not 
be  called  upon  to  take  any  shares,  and  that  the  shares  nominally 
subscribed  for  by  him  should  be  allotted  to  such  persons  as  might 
apply  to  the  company  for  shares.9  A  statement  that  a  certain, 
number  of  shares  have  been  subscribed  for,  may  be  materially  false- 
if  the  shares  mentioned  are  to  be  paid  for,  not  in  cash,  but  by  the 
transfer  of  property,  or  franchises,  or  by  labor  to  be  performed.10 
It  was  held  in  Downey  v.  Finucane,11  that  it  was  a  question  for 
the  jury  whether  a  statement  that  413,030  shares  of  the  stock  of 
the  company  had  been  issued,  or  contracted  to  be  issued,  was 
fraudulent  in  view  of  the  fact  that  410,000  of  these  shares  of  a  par 


United  Kingdom  and  Colonies. — 
Wright's  Case,  L.  R.  7  Ch.  App.  55, 
41  L.  J.  Ch.  N.  S.  1 ;  rev'g  Wright's 
Case,  L.  R.  12  Eq.  331;  Wainwright's 
Case,  63  L.  T.  N.  S.  429;  Cridland 
v.  DeMauley,  1  DeG.  &  Sm.  459; 
Ross  v.  Estates  Investment  Co.,  L. 
R.  3  Eq.  122,  affirmed,  L.  R.  3  Ch. 
App.  682;  Wilson  v.  Hotchkiss,  2 
Ont.  L.  R.  261,  affirmed,  sub  nom. 
Milburn  v.  Wilson,  31  Can.  S.  C. 
481 ;  Wontner  v.  Shairp,  4  C.  B.  404. 

And  see  note  to  Fear  v.  Bartlett, 
33  L.  R.  A.  721,  734. 

Whether  a  false  statement  that 
the  London  share  list  had  been 
closed  would  make  the  result- 
ing subscriptions  voidable,  query. 
Blake's  Case,  34  Beav.  639,  643,  34 
L.  J.  Ch.  N.  S.  278,  13  W.  R.  486. 

It  has  been  held  that  a  statement 
that  a  certain  number  of  shares 
have  been  subscribed  for,  is  not  ren- 
dered false  by  the  fact  that  all  of 
the  deposits  thereon  have  not  been 


paid.  Vane  v.  Cobbold,  1  Exch.  798 ; 
cf.  Bevan  v.  Adams,  22  L.  T.  N.  S. 
795. 

It  has  been  held  that  a  misrepre- 
sentation as  to  the  number  of  shares 
subscribed  for  must,  to  justify  a, 
rescission,  be  substantially,  false.  A. 
statement  only  slightly  false  is  not; 
sufficient.  National  Leather  Co.  v.. 
Roberts,  221  Fed.  Rep.  922,  137  C.. 
C.  A.  492. 

9.  Ross  v.  Estates  Investment  Co.,, 
L.   R.  3  Eq.  122,  affirmed,  L.   R.  3 
Ch.  App.  682. 

10.  Arnison   v.    Smith,    L.    R.    41 
Ch.  Div  348,  and  see  State  v.  Jeffer- 
son Turnpike  Co.,  3  Humph.  (Tenn.> 
305. 

Parol  evidence  is  not  admissible  to 
show  that  a  subscription  uncondi- 
tional upon  its  face  was  to  be  paid 
by  a  transfer  of  property.  Merrick 
v.  Consumers  Heat  &  Elec.  Co.,  Ill 
111.  App.  153. 

11.  205  N.  Y.  251,  262,  263,  98  X 
E.  391,  40  L.  R.  A.  N.  S.  307. 


408 


THE  LAW  OF  PROMOTERS. 


value  of  $41,000,000  had  been  issued  to  the  promoters  in  payment 
for  property  purchased  by  them  for  $250,000. 

A  misrepresentation  as  to  the  number  of  shares  remaining  in  the 
treasury  is  a  misrepresentation  of  a  material  fact.12 

§  219.  The  same  subject. — Sham  subscriptions. 

It  frequently  happens  that  promoters,  in  order  to  influence 
those  whom  they  subsequently  solicit,  obtain  the  first  signatures 
to  the  subscription  agreement  by  secret  promises  that  the  parties 
so  signing  shall  receive  their  shares  without  payment,  that  their 
subscriptions  shall  not  be  enforced  against  them,  or  by  promises 
of  collateral  benefits  not  appearing  upon  the  face  of  the  subscrip- 
tion agreement.  Secret  promises  of  this  character  constitute  a 
fraud  upon  the  other  subscribers,  are  contrary  to  public  policy 
and  void,  and  the  subscription  agreement  is  enforceable  according 
to  its  terms.13 


12.  Hamilton  v.  American  Hulled 
Bean  Co.,  156  Mich.  600,  121  N.  W. 
731;   same   case   on   demurrer,   143 
Mich.  277,  106  N.  W.  731. 

13.  Federal. — Morgan    v.    Struth- 
•ers,  131  U.  S.  246,  254-255,  33  L.  Ed. 
132,  9  Sup.  Ct.  726. 

Connecticut. — Litchfield  Bank  v. 
Church,  29  Conn.  137. 

Idaho. — Meholin  v.  Carlson,  17 
Idaho  742,  107  Pac.  755,  134  Am.  St. 
Rep.  286. 

Illinois. — Merrick  v.  Consumers 
H.  &  E.  Co.,  Ill  HI.  App.  153 ;  Mel- 
vin  v.  Lamar  Ins.  Co.,  80  111.  446,  22 
Am.  St.  R.  199,  and  cases  cited; 
Jewell  v.  Rock  River  Paper  Co.,  101 
111.  57;  Galena  &  Southern  Wiscon- 
sin R.  R.  Co.  v.  Ennor,  116  111.  55,  4 
N.  E.  762 ;  Great  Western  Telegraph 
Co.  v.  Haight,  49  111.  App.  633. 

Massachusetts. — N ickerson    v. 


English,  142  Mass.  267,  8  N.  E.  45. 

Michigan. — Zabel  v.  New  State 
Tel.  Co.,  127  Mich.  402,  86  N.  W. 
949. 

Missouri. — Ollesheimer  v.  Thomp- 
son Mfg.  Co.,  44  Mo.  App.  172,  182, 
and  cases  cited ;  Haskell  v.  Sells,  14 
Mo.  App.  91,  101;  Newland  Hotel 
Co.  v.  Wright,  73  Mo.  App.  240. 

Nebraska. — York  Park  B  1  d  g. 
Assoc.  v.  Barnes,  39  Neb.  834,  58  N. 
W.  440. 

New  Hampshire. — White  Mts.  R. 
R.  v.  Eastman,  34  N.  H.  124,  139, 
et  seq. 

New  York. — Meyer  v.  Blair,  109 
N.  Y.  600,  605,  17  N.  E.  228,  4  Am. 
St.  R.  500;  Yonkers  Gazette  Co.  v. 
Jones,  30  App.  Div.  316,  51  Supp. 
973;  Phoenix  Warehousing  Co.  v. 
Badger,  6  Hun  293,  affirmed,  67  N. 
Y.  294. 


FALSE  REPRESENTATIONS. 


409 


As  to  the  effect  of  such  secret  collateral  agreements  upon  the 
rights  and  obligations  of  the  other  subscribers  the  cases  are  not 
altogether  in  accord.  Some  authorities  hold  that  those  who  enter 
their  subscriptions  in  reliance  upon  the  genuineness  of  the  sham 
subscriptions  are  entitled  to  rescind.14  Other  authorities  hold 
that  as  the  secret  collateral  agreement  is  void,  and  the  sham  sub- 
scribers are  bound  by  the  terms  of  the  subscription  agreement, 
the  subsequent  subscribers  are  not  injured  and  their  subscriptions 
are  binding.15  The  fact  that  the  sham  subscribers  are  held  bound 
by  the  apparent  terms  of  their  subscriptions  without  regard  to  the 
collateral  agreements  of  the  promoters,  does  not,  however,  neces- 
sarily cure  the  fraud.  It  may  be  that  the  only  inducement  con- 
sidered by  the  subsequent  subscribers  was  the  fact  that  a  certain 


Oregon. — Wills  v.  Nehalem  Coal 
Co.,  52  Or.  70,  85,  96  Pac.  528,  533, 
and  authorities  cited. 

Pennsylvania. — Harvey  v.  Weit- 
zenkorn,  232  Pa.  447,  81  Atl.  447; 
Jeannette  Bottle  Works  v.  Schall, 
13  Pa.  Super.  Ct.  96;  Scranton 
Luna  Park  Assoc.  v.  Osthaus,  8 
Lack.  Jur.  345. 

Vermont. — Blodgett  v.  Morrill,  20 
Vt.  509. 

See  also  cases  cited  in  note  to 
Yale  Gas  Stove  Co.  v.  Wilcox,  25 
L.  R.  A.  90,  101.  See  also  ante,  § 
70. 

Such  agreements  may  under  spe- 
cial circumstances  be  availed  of  by 
the  subscribers.  See  ante,  §  70  and 
notes. 

14.  Alabama. — Alabama  F.  &  M. 
Works  v.  Dallas,  127  Ala.  513,  29 
So.  459. 

Iowa. — Coles  v.  Kennedy,  81  Iowa 
360,  46  N.  W.  1088,  25  Am.  St.  Rep. 
503;  see  State  Bank  of  Indiana  v. 
Cook,  125  Iowa  111,  100  N.  W.  72. 


Pennsylvania. — Custar  v.  Titus- 
ville  Gas  &  Water  Co.,  63  Pa.  381. 

'Wisconsin. — Luetzke  v.  Roberts, 
130  Wis.  97,  109  N.  W.  949. 

United  Kingdom  and  Colonies. — 
Addison's  Case,  L.  R.  20  Eq.  620. 

15.  Anderson  v.  Newcastle,  etc., 
R.  R.  Co.,  12  Ind.  376,  74  Am.  Dec. 
218;  Dynes  v.  Shaffer,  19  Ind.  165; 
Chouteau  Ins.  Co.  v.  Floyd,  74  Mo. 
286;  Armstrong  v.  Danahy,  75  Hun 
(N.  Y.)  405,  56  N.  Y.  St.  R.  743,  27 
Supp.  60,  citing  Cook  on  Stock  & 
Stockholders,  §  191,  and  Thompson 
on  Liability  of  Stockholders,  §  124; 
Conn.  &  Pass.  Rivers  R.  R.  Co.  v. 
Bailey,  24  Vt.  465,  476,  et  seq.,  58 
Am.  Dec.  181 ;  Wilson  v.  Hundley, 
96  Va.  96,  30  S.  E.  492,  70  Am.  St. 
R.  837,  citing  2  Thompson  on  Cor- 
porations, §§  1404-1406,  1  Mora- 
wetz  on  Private  Corporations,  §  107 ; 
Taylor  on  Corporations,  §§  105,  521. 
See  also  note  to  Fear  v.  Bartlett,  33 
L.  R.  A.  721,  738. 


410  THE  LAW  OF  PROMOTERS. 

amount  of  capital  had  been  secured  to  the  corporation,  but  the 
chief  inducement  is,  in  many  cases,  the  fact  that  other  persons,  per- 
haps persons  of  prominence,  or  persons  upon  whose  judgment  the 
subsequent  subscribers  rely,  have  sufficient  confidence  in  the  under- 
taking to  invest  their  money  in  the  shares.16  If  this  appears  to 
be  the  fact,  the  only  justification  for  denying  the  right  of  the 
subsequent  subscribers  to  rescind,  is  the  fear  that  to  allow  a  rescis- 
sion would  throw  the  affairs  of  the  corporation  into  confusion, 
and  work  hardship  upon  other  innocent  subscribers.  There  is,  in 
any  event,  no  reason  why  promoters,  who  by  the  use  of  sham  sub- 
scriptions induce  others  to  purchase  the  shares  of  the  corpora- 
tion, should  not  be  personally  liable  for  the  damages  caused  by 
their  fraud.17 

It  should  be  noted  that  it  will  not  be  presumed  that  a  subscriber 
entered  his  subscription  upon  the  faith  of  subscriptions  made 
by  others,  and  that  one  complaining  of  sham  subscriptions  must 
show  that  he  was,  in  fact,  influenced  thereby.18 

If  the  shares  have  been  in  good  faith  subscribed  for,  the  subse- 
quent failure  of  a  subscriber  to  make  good  his  subscription  and 
pay  for  his  shares  does  not  operate  as  a  fraud  upon  the  other 
subscribers,  or  give  rise  to  any  cause  of  complaint  on  their  part.19 

16.  See  post,  §  220,  notes  23  and          United  Kingdom  and   Colonies. — 
24.  Twycross  v.  Grant,  L.  R.  2  C.  P.  D. 

17.  Illinois.— Goodwin  v.  Wilbur,      469,  483. 

104  111.  App.  45,  52.  And  see  post,  §  220'. 

New  York. — Miller  v.  Barber,  66  18.  Whittlesey  v.  Frantz,  74  N.  Y. 

N.  Y.  558 ;  Getty  v.  Devlin,  54  N.  Y.  456,  462. 

403;  Walker  v.  Anglo-Am.  Mtge.  &  19.  Penobscot  R.  R.  Co.  v.  White, 

Trust  Co.,  72  Hun  334,  341,  55  St.  41  Me.  512,  66  Am.  Dec.  257 ;  Salem 

R.  54,  25   Supp.   432,  quoting  from  Mill   Dam   Corporation   v.   Ropes,  9 

Twycross   v.   Grant,   L.   R.   2  C.    P.  Pick.  (Mass.)  187,  19  Am.  Dec.  363; 

D.  469,  483.  West  End  Real  Estate  Co.  v.  Clai- 

Pennsylvania. — Scranton      Luna  borne,  97  Va.  734,  749,  34  S.  E.  900. 

Park  Assoc.  v.  Osthaus,  8  Lack.  Jur.  The  effect  upon  the  obligations  of 

345.  the  other  subscribers,  of  the  release 

Vermont. — Paddock  v.  Fletcher,  42  by  the  corporation  of  some  of  the 

Vt.  389.  subscribers,  is  not  entirely  clear.    It 


FALSE  REPRESENTATIONS. 

If,  however,  the  promoters,  with  intent  to  deceive  subsequent  sub- 
scribers, procure  the  signatures  of  irresponsible  parties,  the  subse- 
quent subscriptions  so  induced  are  undoubtedly  procured  by  fraud, 
and  the  deceived  subscribers  may  either  sue  the  promoters  for  fraud 
and  deceit,  or  rescind  their  subscriptions.20 

It  has  been  held  that  the  fact  that  a  subscriber  rescinds  his  sub- 
scription because  of  the  fraudulent  representations  by  which  the 
same  was  induced,  does  not  release  subsequent  subscribers  from 
liability  upon  their  subscriptions,  even  though  the  rescinded  sub- 
scription was  a  material  inducement  to  the  subsequent  subscrip- 
tions.21 The  fact  that  subsequent  subscriptions  were  made  upon 
the  faith  of  an  earlier  subscription  procured  by  fraud,  does  not 
bar  the  cancellation  of  the  earlier  subscription.22 

§  220.  Materiality  of  representations  as  to  identity  of  subscrib- 
ers. 
The  personnel  of  the  stockholders  of  the  corporation  is  at  all 

has  been  held  that  the  non-assenting  20.  See  Penobscot  Railroad  Co.  v. 
subscribers  are  released.  Rutz  v.  White,  41  Me.  512,  66  Am.  Dec.  257. 
Esler  &  R.  Mfg.  Co.,  3  111.  App.  21.  Richmond's  Case  &  Painter's 
83,  and  cases  cited;  Hall  v.  Gray-  Case,  4  K.  &  J.  305,  and  see  Gib- 
son County  National  Bank,  36  Tex.  son's  Case,  2  DeG.  &  J.  275,  284. 
Civ.  App.  317,  331,  81  S.  W.  762,  See  Lindley  on  Companies,  (6th 
770;  see  Whittlesey  v.  Frantz,  74  Ed.),  pp.  108-109. 
N.  Y.  456,  462.  The  better  rule  22.  Brockwell's  Case,  4  Drewry 
seems  to  be  that  the  corporation  205,  214. 

cannot  release  any  subscriber  with-  Where  a  number  of  subscriptions 

out  the  consent  of  all  others,  and  were  procured  by  the  same  fraud, 

that  the  attempted  release  is  of  no  the  fact  that  the  majority  of  the 

effect.      See    Morgan    v.    Struthers,  subscribers  make  no  complaint  is  no 

131  U.   S.  246,  254,  33  L.   Ed.  132,  reason   for   refusing   to   cancel   the 

9  Sup.  Ct.  726,  and  cases  cited ;  Hall  subscriptions  of  those  who  do  com- 

v.  Selma  &  Tenn.  R.  R.  Co.,  6  Ala.  plain.     Brockwell's  Case,  4  Drewry 

741;   Fey   v.   Peoria  Watch  Co.,  32  205;   Nicol's   Case,   3   DeGex.   &   J. 

111.  App.  618,  627,  et  seq.;  Hastings  387,  425;  cf.  Macbride  v.   Lindsay, 

Lumber  Co.  v.  Edwards,  188  Mass.  9  Hare  574,  where  it  is  held  that  the 

587,  75  N.  E.  57.  other    subscribers    must    be    made 

parties  to  the  action. 


412 


THE  LAW  OF  PROMOTERS. 


times  subject  to  change,  and  if  the  number  of  shares  subscribed 
for  is  correctly  stated,  the  fact  that  a  subscriber  was  misled  as  to 
the  identity  of  the  other  subscribers  is,  in  the  absence  of  intentional 
deceit,  no  ground  for  rescission.23  A  subscriber  may,  in  becoming 
a  party  to  an  enterprise,  be  largely  influenced  by  the  character  of 
those  who  are,  or  may  be,  identified  with  it.  He  may  also  be  in- 
fluenced by  the  fact  that  persons  in  whose  judgment  he  has  confi- 
dence are  willing  to  subscribe  for  shares.  There  need  be  no  hesi- 
tation in  saying  that  an  intentional  misstatement  as  to  the  identity 
of  the  subscribers  may  be  made  the  basis  of  complaint  by  one  who 
was  thereby  induced  to  become  a  subscriber  for  the  company's 
shares.24 


23.  Haskell  v.  Worthington,  94 
Mo.  560,  7  S.  W.  481;  Cunningham 
v.  Edgefleld  &  Ky.  R.  R.  Co.,  2 
Head.  (Tenn.)  23;  Gibson's  Case,  2 
DeGex.  &  J.  275,  and  see  Morgan 
v.  Struthers,  131  U.  S.  246,  33  L. 
Ed.  132,  9  Sup.  Ct.  726;  Meyer  v. 
Blair,  109  N.  Y.  600,  17  N.  E.  228,  4 
Am.  St.  Rep.  500.  And  see  ante, 
§  219. 

In  Hall  v.  Grayson  County  Na- 
tional Bank,  36  Tex.  Civ.  App.  317, 
329,  331,  81  S.  W.  762,  769,  770,  it 
appeared  that  one  Blake  had  rep- 
resented to  the  appellant  Hall  that 
certain  land  to  be  purchased  by  the 
corporation  had  cost  $30,000.  The 
land  had  only  cost  $17,000.  After 
Hall  had  learned  of  the  falsity  of 
the  representation,  and  before  he 
agreed  to  continue  his  subscription 
in  the  proposed  corporation,  Blake 
represented  to  Hall  that  he,  Blake, 
had  been  deceived  by  other  parties 
and  did  not  know  that  the  land  cost 
less  than  $30,000  at  the  time  that  he 
had  made  that  statement,  and  the 


appellant  believing  this  fact,  was 
thereby  induced  to  continue  his 
subscription.  It  was  shown  on  the 
trial  that  Blake  had,  at  the  time 
that  he  stated  to  Hall  that  the  land 
had  cost  $30,000,  known  such  state- 
ment to  be  false.  The  court  said 
"  It  being  shown  by  the  testimony 
that  Blake  would  be  a  stockholder 
in  the  company,  and  have  a  right 
to  participate  in  its  acts,  and  to 
some  extent  direct  and  control  the 
business  and  policy  of  the  corpora- 
tion, it  was  a  material  matter  to 
appellant  that  he  be  a  person  of 
integrity  and  honor,  who  would  deal 
fairly  and  honestly  with  his  asso- 
ciates in  the  corporation  "  and  ap- 
parently concluded  that  the  repre- 
sentation that  Blake  had  acted  in- 
nocently in  stating  the  cost  of  the 
property  as  $30,000,  was  a  misrepre- 
sentation of  a  material  fact. 

24.  Illinois. — Jewell  v.  Rock 
River  Paper  Co.,  101  111.  57,  66-67. 

Iowa. — State  Bank  of  Indiana  v. 
Cook,  125  Iowa  111,  100  N.  W.  72. 


FALSE  REPRESENTATIONS.  413 

It  has  been  held  that  an  agreement  between  the  promoters  and 
one  of  the  subscribers  that  the  promoters  will,  at  the  end  of  a 
stipulated  time,  upon  request  of  such  subscriber,  take  his  shares 
off  his  hands  at  the  subscription  price,  is,  if  untainted  with  actual 
fraud,  valid  and  enforceable  against  the  promoters.25  An  agree- 
ment of  this  character  might,  because  of  the  influence  upon  the 
other  subscribers  of  the  consideration  that  prominent  persons  are 
willing  to  risk  their  money  in  the  enterprise,  be  made  an  instru- 
ment of  fraud.  The  courts  would  in  case  of  intentional  deceit  un- 
doubtedly grant  relief  to  the  deceived  subscribers. 

§  221.  Materiality  of  representations  as  to  price  paid  for  shares. 
A  statement  that  all  the  shares  sold  have  been  sold  at  a  price 
not  less  than  that  asked  of  the  person  then  solicited  is,  if  false,  a 
misrepresentation  of  a  material  fact.28  A  subscriber  may  well  be 
influenced  by  the  consideration  that  others  have  been  willing  to 
take  shares  upon  the  same  terms,  and  it  is  furthermore  often  im- 

Kentucky. — Southern   Ins.   Co.    v.  37;  Meyer  v.  Blair,  109  N.  Y.  600, 

Milligan,    154    Ky.   216,    157    S.    W.  17  N.  E.  228,  4  Am.   St.  Rep.  500; 

37.  McClymonds     v.     Stewart,     2     Pa. 

Maryland. — Wenstrom  C.  D.  &  M.  Super.     Ct.     310 ;     Scranton     Luna 

Co.  v.  Purnell,  75  Md.  113,  122,  23  Park    Assoc.    v.    Osthaus,    8    Lack. 

Atl.  134.  Jur.    (Pa.)   345. 

Missouri. — Meinershagen   v.    Tay-  But  cf.  ante,  §  90. 

lor,  169  Mo.  App.  12,  154  S.  W.  886.  26.  Iowa.— State     Bank     of     In- 

Texas. — Bohm    v.    Burton    Lingo  diana   v.   Cook,   125   Iowa   111,   100 

C0i>  _  Tex.   Civ.   App.   — ,  175   S.  N.  W.  72. 

W.  173.  Maryland. — Wenstrom   Consol.   D. 

Washington. — Johns  v.  Coffee,  74  &   M.   Co.   v.   Purnell,   75   Md.   113, 

Wash.  189,  133  Pac.  4,  affirmed  on  122,  23  Atl.  134,  136. 

reargument,  77  Wash.  700,  137  Pac.  Massachusetts. — Kilgore  v.  Bruce, 

808.  166  Mass.  136,  44  N.  E.  108. 

See  ante,  §  219.  Michigan. — Nichols   v.    Buell,   157 

25.  Morgan  v.   Struthers,  131  U.  Mich.  609,  122  N.  W.  217. 

S.  246,  33  L.  Ed.  132,  9  Sup.  Ct.  726 ;  New  Jersey — Hubbard    v.    Inter- 

Kincaid  v.  Overshiner,  171  111.  App.  ternational  Merc.  Agency,  68  N.  J. 

Eq.  434,  59  Atl.  24. 


414  THE  LAW  OF  PROMOTERS.   ' 

portant  for  a  subscriber  to  know  that  no  other  person  is,  by  rea- 
son of  having  acquired  shares  at  a  lesser  price,  in  a  position  to 
sell  more  cheaply.27  If,  as  is  frequently  the  case,  the  representa- 
tion relates  to  the  price  at  which  the  shares  were  sold  by  the  cor- 
poration itself,  the  representation  is  material,  not  only  because 
of  the  considerations  already  stated,  but  also  because  the  price 
received  by  the  corporation  has,  in  general,  a  direct  bearing  upon 
the  extent  of  its  assets  and  therefore  upon  the  value  of  its  shares.28 

§  222.  Materiality  of  representation  that  stock  sold  is  treasury 
stock. 

It  may,  in  many  cases,  be  a  matter  of  no  moment  to  the  pur- 
chaser, whether  the  stock  acquired  by  him  is  treasury  stock,  or 
stock  previously  issued  by  the  corporation.  This  consideration 
may,  however,  sometimes  become  material.  The  fact  that  a  share- 
holder, or  a  particular  shareholder,  is  desirous  of  selling  his  shares, 
might  often  be  taken  into  consideration  in  determining  the  probable 
desirability  of  the  shares.  It  is  also  sometimes  a  material  con- 
sideration in  the  mind  of  the  purchaser,  that  the  purchase  moneys 
to  be  paid  by  him  are  to  go  into  the  treasury  of  the  corporation.29 

It  is  held  in  National  Leather  Co.  v.  Roberts  30  that  a  false  rep- 
resentation made  to  complainant  that  the  preferred  stock  offered 
to  him  had  been  contracted  for  by  a  prior  subscriber  who  in- 
sisted on  retaining  the  common  stock  given  as  a  bonus,  as  a  result 
of  which  representation  the  complainant  took  the  preferred  stock 
without  the  bonus  of  common  stock  given  to  all  other  subscribers, 

27.  See  Hambleton   v.  Rhind,  84  277,  32  Atl.  899;  Findlater  v.  Dor- 
Md.  456,  488,  36  Atl.  597,  40  L.  R.  land,  152  Mich.  301,  116  N.  W.  410; 
A.  216,  231.  cf.  Wilson  v.  Meyer,  154  N.  Y.  App. 

28.  Coolidge  v.   Goddard,  77  Me.  Div.  300,  138  Supp.  1048,  also  Bur- 
578,  1  Atl.  831;  Caswell  v.  Hunton,  wash    v.    Ballou,    332    111.    App.    71, 
87  Me.  277,  32  Atl.  899.  affirmed,  230  111.  34,  82  N.  E.  355,  15 

29.  Hunter     v.     French     League  L.  R.  A.  N.  S.  401). 

Safety  Cure  Co.,  96  Iowa  573,  65  N.  30.  221  Fed.  Rep.  922,  137  C.  C. 
W.  828;  Caswell  v.  Hunton,  87  Me.  A.  492. 


FALSE  REPRESENTATIONS.  415 

did  not  entitle  the  complainant  to  rescind  on  discovering  that  the 
stock  sold  to  him  was  treasury  stock,  for  the  misrepresentation 
did  not  tend  to  induce  his  subscription,  but  the  contrary. 

§  223.  Misstatements  as  to  value  of  shares. 

It  has  been  held  that  a  false  statement  that  the  shares  of  the 
company  are  of  great  value  and  a  profitable  and  safe  investment 
may  be  made  the  basis  of  an  action  for  fraud.81 

It  was  held  in  Gerhard  v.  Bates  32  that  a  statement  that  the 
promoters  did  not  hesitate  to  guarantee  an  annual  dividend  of 
33  per  cent  upon  the  shares,  was  equivalent  to  a  representation 
that  the  undertaking  was  a  safe  and  profitable  one. 

In  Muck  v.  Hayden,33  representations  that  the  stock  had  an 
actual  intrinsic  value  of  $120  a  share,  and  that  the  value  of  the 
stock  was  rapidly  increasing,  were  held  to  be  representations  as  to 
existing  facts. 

It  is  said  in  Gray  v.  Collins  34  that  a  statement  of  the  defendant 
that  he  believed  money  might  be  made  in  the  shares  and  that  it 
would  pay  to  hold  them  for  a  month,  is  fraudulent  if  the  defendant 
did  not,  in  fact,  entertain  the  belief  which  he  asserted. 

31.  Murray  v.  Tolman,  162  111.  Villard,  207  N.  Y.  587, 101  N.  E.  467 ; 
417,  423-424,  44  N.  E.  748;  Coulter  Campbell  v.  Zion's  Co-op.  Home 
v.  Clark,  160  Ind.  311,  66  N.  E.  Bldg.,  etc.,  Co.,  —  Utah  — ,  148  Pac. 
739;  Grover  v.  Cavanaugh,  40  Ind.  401;  Warner  v.  Benjamin,  89  Wis. 
App.  340,  82  N.  E.  104 ;  McAleer  v.  290,  62  N.  W.  179. 
Horsey,  35  Md.  439;  Champion  32.  2  E.  &  B.  476,  and  see  Hay- 
Funding  &  Foundry  Co.  v.  Heskett,  ward  v.  Leeson,  post,  §  231.  The 
125  Mo.  App.  516,  532,  102  S.  W.  expression  "This  means  early  divi- 
1050;  Cross  v.  Sackett,  2<  Bosw.  dends "  following  an  estimate  of  the 
(N.  Y.)  617,  6  Abb.  Pr.  247,  16  earning  capacity  of  the  plant,  was 
How.  Pr.  62,  and  cases  cited;  Bar-  properly  held  a  mere  expression  of 
her  v.  Morgan,  51  Barb.  (N.  Y.)  opinion  in  Burwash  v.  Ballou,  132 
116.  111.  App.  71,  84,  affirmed,  230  111. 

Cf.    Kimber    v.    Young,    137    Fed.  34,  82  N.  E.  355,  15  L.  R.  A.  N.  S. 

Rep.  744,  70  C.  C.  A.  178,  and  cases  409. 

cited;    Coca-Cola    Bottling    Co.    of  33.  173  Mo.   App.  27,   155  S.   W. 

Chicago  v.   Anderson,   13   Ga.   App.  889. 

772,   80  S.   E.  32 ;   Van  Slochem  v.  34.  4  F.  &  F.  302. 


416  THE  LAW  OP  PROMOTERS. 

It  has  been  held  that  promoters  who  by  means  of  fictitious 
sales  create  an  artificial  market  value  for  the  securities  of  the 
corporation,  may  be  held  liable  to  those  who,  in  reliance  upon 
the  apparent  market  value,  purchase  the  securities  to  their 
damage.35 

§  224.  Materiality  of  representations  as  to  legal  status  of  com- 
pany, or  shares. 

A  representation  that  the  company  is  a  legally  organized  cor- 
poration is,  unless  the  company  is  at  least  a  de  facto  corporation, 
a  misrepresentation  of  a  material  fact,  because  of  the  bearing  of 
that  question  upon  the  stockholders'  liability.36 

The  issuance  of  a  stock  certificate  is  a  representation  to  the 
world  that  a  corporation  is  an  existing  institution,  and  the  per- 
sons signing  the  certificate  may,  if  this  is  not  so,  be  held  liable  to 
any  one  injured  thereby.37 

A  representation  that  the  subscription  solicited  is  one  to  the 
shares  of  a  company  to  be  formed,  has  been  held  a  misrepresenta- 
tion of  a  material  fact  if  the  company  in  question  was  at  the  time 
already  in  existence.38 

35.  McElroy  v.  Harnack,  213  Pa.  71,    108,    see   Nelson   v.    Luling,   62 
444,    63    Atl.    127,    distinguished    in  N.    Y.    645.      But    compare    Wright 
Ballantine    v.    Cummings,    220    Pa.  Bros.     v.     Merchants'     &    Planters' 
621,  633,  70  Atl.  546.     See  Fottler  v.  Packet    Co.,    104   Miss.    507,   61    So. 
Moseley,   179   Mass. v  295,   60  N.   E.  550.      And    see    note    to    Jones    v. 
788.  Dodge,  L.  R.  A.  N.  S.,  1915  A.  475. 

36.  See  Maine  v.  Midland  Invest-          A   person    induced    by   the   false 
ment  Co.,  132  Iowa  272,  109  N.  W.  representations  of  the  promoter  to 
801 ;  Nichols  v.  Buell,  157  Mich.  609,  donate  lands  to  the  supposed  cor- 
122  N.  W.  217;  Bolton  v.  Prather,  poration,  may  sue  the  promoter  for 
35  Tex.  Civ.  App.  295,  80  S.  W.  666.  damages     for     fraud     and     deceit. 

If  the  company  is  a  corporation  Davidson   v.   Hobson,   59   Mo.   App, 

de  facto,  the  circumstance  that  it  130. 

is  not  a  corporation  de  jure  is  per-  37.  Merchants   National   Bank  v, 

haps  immaterial.     Burwash  v.  Bal-  Robison,  8  Utah  256,  30  Pac.  985. 

lou,  230  111.  34,  82  N.  E.  355,  15  L.  R.  38.  Johns  v.  Coffee,  74  Wash.  189, 

A.  N.  S.  409,  affirming,  132  111.  App.  133   Pac.   4,   affirmed   on   rehearing, 

77  Wash.  700,  137  Pac.  808. 


FALSE  REPRESENTATIONS. 


417 


A  representation  that  the  shares  of  an  existing  corporation  are 
non-assessable,  is  a  representation  -that  the  corporation  has  taken 
such  steps  as  are  necessary  to  effectually  bar  its  right  to  levy  an 
assessment,  and  therefore  a  representation  of  an  existing  fact.39 
A  representation  that  the  shares  of  a  corporation  to  be  organized 
are  to  be  non-assessable,  would  generally  be  a  representation  in 
regard  to  some  future  action,  and  often  a  representation  as  to  a 
matter  of  law. 


§  225.  Representations  as  to  future  action. 

It  is  a  general  rule  that  a  representation  is  not  fraudulent  unless 
it  is  a  misrepresentation  of  some  existing  fact,  and  not  a  mere 
expression  of  opinion  or  promise  in  regard  to  some  future  action.40 

Promissory  statements  may,  however,  be  made  in  such  terms  that 
they  imply  that  certain  conditions  exist  at  the  time  and  form  the 
basis  of  the  promised  future  state  of  things.  When  they  are  of 


39.  Browne  v.  San  Gabriel  River 
Rock  Co.,  22  Cal.  App.  682,  136  Pac. 
542 ;  Windram  v.  French,  151  Mass. 
547,  24  N.  E.  914,  8  L.  R.  A.  750 ;  cf . 
Van  Slochem  v.  Villard,  207  N.   Y. 
587,  101  N.  E.  467. 

40.  Federal. — B  a  n  q  u  e    Franco- 
Egyptienne  v.  Brown,  34  Fed.  Rep. 
162,  192. 

Indiana. — Fort  Wayne,  etc.,  Turn- 
pike Co.  v.  Beam,  10  Ind.  563. 

Maryland. — Hughes  v.  Antietam 
Mfg.  Co.,  34  Md.  316. 

Massachusetts. — Lynch  v.  Mur- 
phy, 171  Mass.  307,  50  N.  E.  623. 

Michigan. — Macklen  v.  Fales,  130 
Mich.  66,  89  N.  W.  581;  but  see 
Allen  v.  Pulfer,  159  Mich.  616,  124 
N.  W.  525. 

Minnesota. — Doran  v.  Eaton,  40 
Minn.  35,  41  N.  W.  244. 

Mississippi. — Walker  v.  Mobile  &. 


Ohio  R.  R.  Co.,  34  Miss.  245 ;  Selma 
M.  &  M.  R.  R.  Co.  v.  Anderson,  51 
Miss.  829. 

Missouri. — Muck  v.  Hayden,  173 
Mo.  App.  27,  155  S.  W.  889. 

New  Jersey. — Vreeland  v.  N.  J.. 
Stone  Co.,  29  N.  J.  Eq.  188,  (and 
cases  cited),  affirmed,  29  N.  J.  Eq. 
651. 

New  York — Holdredge  v.  Webb, 
64  Barb.  9. 

Texas. — Gough  Mill  &  Gin  Co.  v. 
Looney,  112  S.  W.  782. 

Wisconsin. — Warner  v.  Benjamin, 
89  Wis.  290,  62  N.  W.  179. 

See  note  to  Fear  v.  Bartlett,  33 
L.  R.  A.  721,  730,  et  seq.;  and  note 
to  Cottrill  v.  Krum,  18  Am.  St.  Rep. 
549,  556,  558,  and  see  post,  §  238, 
also  ante,  §  224. 

But  see  Gray  v.  Collins,  4  F.  &  F. 
302,  and  see  ante,  §  223. 


418  THE  LAW  OF  PROMOTERS. 

this  nature  they  may  be  actionable  if  intentionally  false.41  Other- 
wise, it  is  said,  fraud  cannot  be  predicated  upon  promises  not  per- 
formed.42 

It  was  held  in  Edgington  v.  Fitzmaurice  43  that  a  statement, 
in  a  circular  inviting  subscriptions  for  certain  debentures,  that 
the  object  of  the  issue  was  the  making  of  certain  alterations  and 
additions  to  the  plant  of  the  company,  when  the  real  object  was 
to  pay  off  certain  pressing  liabilities,  was  a  false  statement  of  an 
existing  fact.  The  court  said,  "  It  has  not  been  direetly  held  in 
any  of  the  cases  cited  that  if  the  thing  stated  to  exist  is  an  inten- 
tion of  the  mind  that  may  not  be  a  statement  of  fact  which  is 
obviously  and  certainly  false."  44 

A  statement  that  the  company  would  not  issue  shares  except 
upon  a  certain  stated  basis  is  a  false  representation  of  fact  if  shares 
have  already  been  issued  upon  a  different  basis.45 

§  226.  Falsity  of  representations. 

It  has  been  held  that  a  statement  that  certain  properties  have 
been  acquired  by  the  company  is,  if  false  when  made,  none  the  less 
so  because  the  properties  mentioned  were  actually  acquired  by  the 
company  after  the  complainant  subscribed  for  his  shares,  and 
that  the  complainant  might  rescind  his  subscription  46  or  bring  an 
action  for  damages47  because  of  such  misrepresentation.  If  the 

41.  Banque  Franco-Egyptienne  v.  A  false  statement  as  to  one's  be- 
Brown,  34  Fed.  Rep.  162,  192 ;  Allen  lief  in  the  future  value  of  the  shares 
v.  Pulfer,  159  Mich.  616,  124  N.  W.  may    be    fraudulent.      See    ante,    § 
525.  223. 

42.  See      Banque      Franco-Egyp-  45.  Weems    v.    Georgia    Midland 
tienne  v.  Brown,  34  Fed.  Rep.  162,  &  Gulf  R.  R.  Co.,  84  Ga.  356,  11  S. 
192.  E.  503,  88  Ga.  303,  14  S.  E.  583. 

43.  L.  R.  29  Ch.  Div.  459,  473,  et  46.  Lehman-Charley    v.    Bartlett, 
seg.  135  N.   Y.   App.   Div.   674,  683,   120 

44.  That  a  false  statement  as  to  Supp.  501,  affirmed,  202  N.  Y.  524, 
one's    intention   may   be   made   the  95  N.  E.  1125.    See  ante,  §  209. 
basis   of   an   action   for  fraud,   see  47.  McConnell  v.  Wright,  1903,  1 
Gabriel  v.  Graham,  168  N.  Y.  App.  Ch.    Div.    546.      And   see   Reeve   v. 
Div.  847,  154  Supp.  493.  Dennett,  145  Mass.  23,  30,  11  N.  E. 


FALSE  REPRESENTATIONS.  419 

subscriber  brings  an  action  for  damages  for  fraud  and  deceit,  the 
subsequent  acquisition  of  the  property  might  have  a  material  bear- 
ing upon  the  extent  of  his  damages.48  It  has  been  held  that  an 
action  cannot  be  based  upon  a  statement  which,  though  false 
when  the  prospectus  was  issued,  was  made  true  before  the  time  when 
the  plaintiff  applied  for  shares.49 

An  application  for  shares,  made  on  the  faith  of  a  statement 
which  though  true  when  made  became  untrue  before  the  shares 
were  allotted,  may  be  withdrawn,50  and  if  the  fact  that  such  state- 
ment had  become  untrue  before  the  allotment,  is,  though  known 
to  the  company,  not  communicated  to  the  subscribers,  the  subscrip- 
tions made  in  reliance  thereon  may  be  rescinded.51  A  promoter 
who  makes  the  allotment  without  disclosing  the  changed  circum- 
stances which  render  his  earlier  statement  untrue,  may  be  liable 
for  fraud  and  deceit.52 

§  227.  Interpretation  of  prospectus. 

A  prospectus  being  usually  intended  for  the  general  investing 
public  and  not  for  persons  of  technical  training,  is  interpreted  in 
accordance  with  the  meaning  that  it  would  naturally  convey  to  the 
ordinary  mind.53  If  the  prospectus  taken  as  a  whole  conveys  a 

938.    And  note  to  Cottrill  v.  Krum,  F.  258,  286,  but  see  Reeve  v.  Den- 

18  Am.  St.  Rep.  549,  555.    See  ante,  nett,  145  Mass.  23,  30,  11  N.  E.  938. 

§  209n.  50.  Ex  parte  Brown,  95  L.  T.  N. 

48.  Lehman-Charley    v.    Bartlett,  S.    756,    quoting    Lindley    on    Com- 
135  N.   Y.   App.   Div.   674,  683,  120  panies,   (6th  Ed.),  page  87. 

Supp.  501,  affirmed,  202  N.  Y.  524,  51.  See  Traill  v.  Baring,  4  DeG. 

95  N.  E.  1125.  J.  &  S.  318. 

The     effect     of    the     subsequent  52.  Loewer    v.    Harris,    57    Fed. 

acquisition  of  the  property  upon  the  Rep.  368,  373,  6  C.  C.  A.  394,  14  U. 

amount    of    damages    would    differ  S.  App.  615.     And  see  ante,  §  207, 

according   to   the   rule   of   damages  note  44. 

applied.    For  the  two  rules  of  dam-  53.  Wiser    v.    Lawler,   189   U.    S. 

ages  In  such  case  see  post,  §§  269,  260,  264,  47  L.  Ed.  802,  23  S.  C.  624; 

277.  Tinker  v.  Kier,  195  Mo.  183,  94  S. 

49.  Ship  v.  Crossklll,  L.  R.  10  Eq.  W.  501 ;  Downey  v.  Flnucane,  205 
73,  85-86;  Moore  v.  Burke,  4  F.  & 


420 


THE  LAW  OF  PROMOTERS. 


false  impression  it  is  none  the  less  false  though  there  be  difficulty 
in  showing  that  any  specific  statement  is,  taken  by  itself,  untrue.54 
.  The  court  in  estimating  the  probability  of  the  public  being  mis- 
led by  a  prospectus  will  take  into  consideration,  not  only  the  facts 
stated,  but  also  the  facts  suppressed.55 

It  is,  however,  not  necessary  to  set  forth  such  qualifications  of 
the  matters  stated  as  would  necessarily  be  implied.56 


N.  Y.  251,  262,  98  N.  E.  391,  40  L. 
R.  A.  N.  S.  307. 

Angus  v.  Clifford,  1891,  2  Ch.  Div. 
449,  454 ;  Clarke  v.  Dickson,  6  C.  B. 
N.  S.  453,  468 ;  Peek  v.  Derry,  L.  R. 
37  Ch.  Div.  541,  570,  et  seq.,  re- 
versed on  another  point,  sub  nom. 
Derry  v.  Peek,  L.  R,  14  App.  Cas. 
337;  Aaron's  Reefs  v.  Twiss,  1896, 
App.  Cas.  273,  291;  Components 
Tube  Co.  v.  Naylor,  1900,  2  Ir.  R. 
1,  77;  Arnison  v.  Smith,  L.  R.  41 
Ch.  Div.  348,  373;  New  Sombrero 
Phosphate  Co.  v.  Erlanger,  L.  R.  5 
Ch.  Div.  73,  124-125,  25  W.  R.  436, 
affirmed,  sub  nom.  Erlanger  v.  New 
Sombrero  Phosphate  Co.,  L.  R.  3 
App.  Cas.  1218,  6  Eng.  Rul.  Cas. 
777,  39  L.  T.  N.  S.  269,  27  W.  R  65 ; 
Gluckstein  v.  Barnes,  1900,  App. 
Cas.  240,  250-251;  Moore  v.  Burke, 
4  F.  &  F.  258,  287;  cf.  Smith  v. 
Clench,  4  F.  &  F.  578. 

54.  Downey  v.  Finucane,  205  N. 
Y.  251,  264,  98  N.  E.  391,  40  L.  R.  A. 
N.  S.  307. 

Aaron's  Reefs  v.  Twiss,  1896, 
App.  Cas.  273,  281;  McConnell 
v.  Wright,  1903,  1  Ch.  Div.  546,  551 ; 
Components  Tube  Co.  v.  Naylor, 
1900,  2  Ir.  R.  1,  27 ;  Ross  v.  Estates 
Investment  Co.,  L.  R.  3  Eq.  122, 
135-136,  affirmed,  L.  R.  3  Ch.  App. 
682;  Smith  v.  Chadwick,  L.  R.  20 


Ch.  Div.  27,  46,  46  L.  T.  N.  S.  702, 
affirmed,  L.  R,  9  App.  Cas.  187, 
5  Am.  &  Eng.  Corp.  Cas.  23; 
Directors  of  Central  Ry.  of  Vene- 
zuela v.  Kisch,  L.  R.  2  H.  L.  99,  125, 
16  L.  T.  N.  S.  500;  New  Bruns- 
wick &  Can.  Ry.,  etc.,  Co.  v.  Mugge- 
ridge,  1  Dr.  &  Sm.  363,  379,  380; 
Scott  v.  Snyder  Dynamite  Projectile 
Co.,  Ltd.,  67  L.  T.  N.  S.  104 ;  Clarke 
v.  Dickson,  6  C.  B.  N.  S.  453. 

Note  to  Newton  National  Bank  v. 
Newbegin,  33  L.  R.  A.  727,  734. 

55.  Wiser   v.   Lawler,   189   U.    S. 
260,   264-265,   47   L.   Ed.   802,   23   S. 
C.  624,  and  cases  cited.     Downey  v. 
Finucane,    205    N.    Y.    251,    262,    98 
N.  E.  391,  40  L.  R.  A.  N.  S.  307.    And 
see  ante,  §  210. 

56.  It  is,   in   describing  the  con- 
cessions owned  by  the  company,  not 
necessary  to  set  forth  qualifications 
which  would  necessarily  be  implied. 
Directors    of    Central    Ry.    Co.    of 
Venezuela  v.  Kisch,  L.   R.  2  H.  L. 
99,  115-116,  16  L.  T.  N.  S.  500. 

If  a  concession  is  to  be  paid  for 
out  of  the  funds  of  the  company 
that  fact  should  be  stated.  Di- 
rectors of  Central  Railway  Co.  of 
Venezuela  v.  Kisch,  L.  R.  2  H.  L. 
99,  117-118,  16  L.  T.  N.  S.  500,  fol- 
lowed in  Aaron's  Reefs  v.  Twiss, 
1896,  App.  Cas.  273,  284,  285.  See 


FALSE  REPRESENTATIONS. 


421 


Allowance  may  be  made  for  the  sanguine  expectations  of  the 
promoters,  for  no  prudent  man  will  accept  the  prospects  which 
are  always  held  out  by  the  originators  of  a  new  scheme,  without 
considerable  abatement.57  Mere  exaggerated  statements  of  the 
prospects  of  a  new  enterprise  will  not  subject  those  who  make  them 
to  liability.58 

Marginal  notes  will  in  general  be  construed  as  a  mere  index  to 
the  prospectus.59 

§  228.  Interpretation  of  prospectus  in  light  of  particular  com- 
plainant. 

It  has  been  said  that  in  determining  whether  the  plaintiff  was  in 
fact  deceived,  it  is  important  to  consider  whether  he  was,  in  view 
of  his  experience,  a  person  likely  to  be  misled  by  a  prospectus 
or  likely  to  place  implicit  reliance  upon  all  that  it  contained.60 

It  has  been  said  that  an  underwriter  complaining  of  a  misstate- 


also  New  Brunswick  &  Canada  Rail- 
way Co.  v.  Muggeridge,  1  Drew.  & 
Sm.  363,  381. 

57.  DuPuy    v.    Transportation    & 
Terminal  Co.,  82  Md.  408,  450-^51, 
33  Atl.  889,  34  Atl.  910,  913,    (dis- 
senting opinion  of  Bryan,  J. )  ;  Di- 
rectors of  Central  Ry.  Co.  of  Vene- 
zuela  v.    Kisch,   L.   R.   2   H.   L.   99, 
113,  16  L.  T.  N.  S.  500. 

58.  Banque  Franco-Egyptienne  v. 
Brown,  34  Fed.  Rep.  162,  192;  Bur- 
wash  v.  Ballou,  230  111.  34,  82  N.  E. 
355,  15  L.  R.  A.  N.  S.  409,  affirming, 
132  111.  App.  71;  Morgan  v.  Skiddy, 
62  N.  Y.  319,  326. 

Kisch  v.  Central  Ry.  Co.  of  Vene- 
zuela, Ltd.,  3  DeG.  J.  &  S.  122,  34  L. 
J.  Ch.  N.  S.  545,  552,  affirmed,  *w6 
nom.  Directors  of  Central  Ry.  Co. 
of  Venezuela  v.  Kisch,  L.  R.  2  H.  L. 
99,  113,  16  L.  T.  N.  S.  500;  Jennings 


v.  Broughton,  17  Beav.  234,  affirmed, 
5  DeG.  M.  &  G.  126 ;  Denton  v.  Mac- 
nell,  L.  R.  2  Eq.  352;  Ross  v.  Es- 
tates Inv.  Co.,  L.  R.  3  Eq.  122,  136, 
affirmed,  L.  R.  3  Ch.  App.  682. 

59.  Moore  v.  Explosives  Co.,  Ltd., 
56  L.  J.  Q.  B.  235. 

60.  Banque  Franco-Egyptienne  v. 
Brown,  34  Fed.  Rep.  162,  193-194; 
Tinker  v.  Kier,  195  Mo.  183,  94  S. 
W.  501. 

Bellairs  v.  Tucker,  L.  R.  13  Q.  B. 
D.  562,  577;  Hallows  v.  Fernie,  L. 
R.  3  Ch.  App.  467,  477 ;  Shrewsbury 
v.  Blount,  2  Man.  &  Gr.  475,  504; 
Capel  &  Co.  v.  Sim's  Ships  Com- 
position Co.,  57  L.  J.  Ch.  N.  S.  713, 
714 ;  Jennings  v.  Broughton,  5  De- 
Gex.  M.  &  G.  126,  129;  Smith  v. 
Chadwick,  L.  R.  9  App.  Cas.  187, 
197,  5  Am.  &  Eng.  Corp.  Cas.  23. 

Cf.  Moore  v.  Burke,  4  F.  &  F.  258, 
287. 


422  THE  LAW  OF  PROMOTERS. 

ment  in  a  prospectus  stands  upon  a  very  different  footing  from  a 
"  careful  investor  "  complaining  of  the  same  prospectus.61 

§  229.  Interpretation  of  prospectus  in  light  of  its  preliminary 

character. 

In  interpreting  a  prospectus  its  preliminary  character  may  be 
taken  into  consideration  and  the  present  sometimes  read  as  the 
future  tense,62  but  where  the  language  of  a  prospectus  clearly  re- 
fers to  something  as  already  accomplished,  it  must  be  so  inter- 
preted.63 A  dated  report  accompanying  a  prospectus  will  be  read 
as  of  its  own  date,  and  not  as  of  the  date  of  the  prospectus.64 

§  230.  Interpretation  of  ambiguous  statements  in  prospectus. 

A  question  of  some  difficulty  arises  when  the  language  of  the 
prospectus  is  susceptible  of  more  than  one  meaning,  and  the  pro- 
moters use  the  words  in  the  sense  in  which  they  are  true,  while  the 
complaining  subscribers  read  them  in  the  sense  in  which  they  are 
untrue.  Some  of  the  earlier  English  cases  hold  that  the  promoters 
may  in  such  case  be  held  liable  for  damages  for  fraud  and  deceit. 

In  Hallows  v.  Fernie,65  Lord  Chancellor  Chelmsford  said,  "  If 
persons  publishing  a  prospectus  use  such  careless  language  that 
their  statements  literally  read  are  untrue,  although  this  literal 
sense  is  different  from  what  they  intended,  this  amounts  to  a  mis- 
representation, for  which  they  may  be  responsible  to  any  one  who 
is  deceived  or  injured  by  it." 

61.  Baty  v.  Keswick,  85  L.  T.  N.  135  N.  Y.  App.  Div.  674,  120  Supp. 
S.    18,    W.    N.    1901,    167;    Banque  501,  affirmed,  202  N.  Y.  523,  95  N. 
Franco-Egyptienne     v.     Brown,     34  E.  1125;  New  Brunswick  &  Canada 
Fed.  Rep.  162,  194.  Ry.,    etc.,     Co.     v.    Muggeridge,     1 

62.  Banque  Franco-Egyptienne  v.  Drewry  &  Smale,  363,  370. 
Brown,    34    Fed.     Rep.    162,    191;  64.  New    Brunswick    &    Canada 
Kelsey  v.  Northern  Light  Oil  Co.,  45  Ry.,  etc.,  Co.  v.  Conybeare,  9  H.  L. 
N.  Y.  505;  Hallows  v.  Fernie,  L.  R.  Cas.  711,  728. 

3  Ch.  App..  467,  475.  65.  L.  R.  3  Ch.  App.  467,  476. 

63.  Lehman-Charley    v.    Bartlett, 


FALSE  REPRESENTATIONS.  423 

"  A  person  who  issues  a  statement,"  said  Lord  Justice  Cotton 
in  Arkwright  v.  Newbold,66  "  is  not  only  answerable  for  what  he 
in  his  own  mind  intended  to  represent,  but  he  is  answerable  for 
what  any  one  might  reasonably  suppose  to  be  the  meaning  of  the 
words  he  has  used." 

In  Peek  v.  Derry,67  the  same  judge  said,  "  The  plaintiff  has  a 
right  to  insist  that  the  defendants  are  liable  for  the  ordinary  mean- 
ing of  the  words  used,  because,  however  much  people  in  their  own 
minds  may  mean  to  qualify  their  statements,  if  a  man  makes  a 
statement  which,  according  to  its  ordinary  meaning,  bears  a  par- 
ticular construction,  he,  in  my  opinion,  is  liable  to  those  who, 
reading  it  and  construing  it  reasonably,  do  put  upon  it  the  primary 
meaning  and  the  fair  construction  of  the  words  used."  Peek  v. 
Derry  was,  however,  reversed  in  the  House  of  Lords,  and  the  doc- 
trine established  that  a  promoter  is  not  liable  for  fraud  and  de- 
ceit if  he  believes  his  representations  to  be  true  in  the  sense  in 
which  he  makes  them,  and  is  not  conscious  of  the  fact  that  his 
words  are  susceptible  of  a  different  meaning;  that  unless  a  de- 
fendant is  conscious  that  his  words  might  be  understood  in  a 
different  sense  from  that  in  which  he  is  honestly,  though  blunder- 
ingly using  them,  he  is  not  guilty  of  fraud.68  This  decision  of  the 

66.  L.  R.  17  Ch.  Div.  301,  322 ;  cf .  324 ;  Hallows  v.  Fernie,  L.  R.  3  Ch. 

Smith   v.   Chadwick,   L.   R.   20   Ch.  App.  467,  478;  Capel  v.  Sim's  Ships 

Div.  27,  79-80,  46  L.  T.  N.  S.  702,  Composition  Co.,  57  L.  J.  Ch.  N.  S. 

affirmed,  L.   R.  9  App.  Gas.  187,  5  713,  714. 

Am.  &  Eng.  Corp.  Cas.  23.  67.  L.    R.   37   Ch.   Div.   541,  571. 

If  the  prospectus  is  susceptible  of  Quoted  in  Arnison  v.  Smith,  L.  R. 

more    than    one    meaning,    a    sub-  41  Ch.  Div.  348,  359. 

scriber  claiming  to   have   been   de-  68.  Derry  v.  Peek,  L.  R.  14  App. 

ceived  must  prove  that  he  read  the  Cas.  337,  347-349;   see  also  Angus 

prospectus  in  the  sense  in  which  it  v.  Clifford,  1891,  2  Ch.  Div.  449,  466- 

was  untrue.    Smith  v.  Chadwick,  L.  467,  472,  478 ;  Greenwood  v.  Leather 

R.  9  App.  Cas.   187,  198,  5  Am.  &  Shod   Wheel  Co.,   1900,  1   Ch.   Div. 

Eng.  Corp.  Cas.  23,  affirming,  L.  R.  421,  434;  Glasier  v.  Rolls,  L.  R.  42 

20  Ch.  Div.  27,  45,  64,  65,  73-74,  76,  Ch.   Div.  436,  461.     This  rule  was 

79,  46  L.  T.  N.  S.  702;  Arkwright  sometimes  applied  even  before  the 

v.  Newbold,  L.  R,  17  Ch.  Div.  301,  decision  of  Derry  v.  Peek ;  see  Smith. 


424  THE  LAW  OF  PROMOTERS. 

House  of  Lords  was  handed  down  in  1889  and  in  the  following  year 
parliament  enacted  the  Directors  Liability  Act.69  In  Greenwood 
v.  Leather  Shod  Wheel  Co.,70  Lindley,  M.  R.,  said  that  a  state- 
ment in  a  prospectus  might  be  untrue  within  the  meaning  of  the 
Directors  Liability  Act  though  not  untrue  in  the  sense  in  which 
it  was  used  by  those  who  issued  the  prospectus.  "  Considering  the 
object  of  a  prospectus,  and  the  object  of  the  Directors  Liability 
Act,  the  meaning  which  is  important  is  the  meaning  which  the 
prospectus  conveys  to  those  who  read  it.  The  meaning  of  those 
who  issue  it  becomes  all-important  when  such  persons  are  charged 
with  fraud ;  for,  if  a  statement  is  ambiguous,  it  may  be  misunder- 
stood without  any  fraud  on  the  part  of  the  person  who  makes  it. 
*  *  *  The  object  of  the  Directors  Liability  Act,  1890,  was  to 
remove  the  defect  in  the  law  brought  to  light  by  the  decision  of 
the  House  of  Lords  in  Derry  v.  Peek,  and  to  impose  upon  those 
who  issue  prospectuses  the  duty  to  take  reasonable  care  not  to 
make  untrue  statements.  This  object  would  be  very  inadequately 
attained  if  the  court  held  that  a  grossly  misleading  statement  was 
not  *  untrue  '  within  the  meaning  of  the  Act  in  question." 

The  question  must  in  this  country  be  determined  without  the 
aid  of  statute  and  there  is  little  assistance  to  be  gained  from  the 
cases.  It  would,  no  doubt,  be  a  salutary  rule  to  make  promoters 
answerable  for  the  truth  of  the  statements  contained  in  the  pro- 
spectus in  any  sense  in  which  their  words  might  reasonably  be 
read ;  in  other  words,  to  compel  them  to  frame  their  prospectus 
so  carefully  that  no  one  could  reasonably  be  misled  thereby. 
A  subscriber  who  has  taken  shares  upon  the  faith  of  a  prospec- 
tus, which,  while  true  as  intended  by  its  framers,  is  false  as  read 

v.  Chadwick,  L.  R.  20  Ch.  Div.  27,  69.  Stat.  53  and  54,  Victoria  Ch. 

79-80,  46  L.  T.  N.  S.  702,  affirmed,  64,   now   contained   in   §   84   of  the 

L.  R.  9  App.  Cas.  187,  5  Am.  &  Eng.  Companies    Act    of    1908,    (Stat.    8, 

Corp.   Cas.   23;  Cleveland  Iron  Co.  Edw.  VII,  Chap.  69).     See  ante,  § 

v.  Stephenson,  4  F.  &  F.  428,  and  207. 

see  Hallows  v.  Fernie,  L.  R.  3  Ch.  70.  1900,  1  Ch.  Div.  421,  434. 
App.  467,  475. 


FALSE  REPRESENTATIONS.  425 

ty  him  may  be  permitted  to  rescind  his  subscription.  To  sustain 
an  action  for  damages  for  fraud  and  deceit  a  fraudulent  intent 
must,  however,  be  shown,  and  no  fraudulent  intent  can  be  charged 
to  a  promoter  whose  representations  were  true  in  the  sense  in 
which  he  made  them,  if  he  did  not  realize  that  his  words  were  sus- 
ceptible of  another  interpretation.71  A  different  rule  can  be 
established  only  by  statute,  but  courts  and  juries  will,  in  any  event, 
be  slow  to  believe  that  a  promoter  who  issued  an  ambiguous  pro- 
spectus was  quite  unconscious  that  his  representations  might  be 
read  in  any  other  than  their  truthful  meaning.72 

§  231.  Interpretation  of  particular  statements. 

In  Milwaukee  Cold  Storage  Co.  v.  Dexter,73  a  statement  in  a 
prospectus  "  Cost  of  ground  $40,000  "  was  held  to  mean  not  that 
$40,000  was  the  price  to  be  paid  for  the  ground  by  the  promoter 
under  his  contract  for  the  purchase  thereof,  but  that  the  sum 
stated  was  to  be  the  cost  of  the  ground  to  the  company. 

In  Simons  v.  Vulcan  Oil  &  Mining  Co.,74  the  court  held  that 
a  statement  that  the  properties  of  the  corporation  had  been 
"  deeded  direct  from  original  owners  to  the  stockholders  "  meant 
that  no  profits  had  been  added  on  account  of  any  intermediate 
buyer ;  that  the  import  of  the  words  "  original  owners  "  was  plain 
and  that  evidence  to  explain  their  meaning  was  not  admissible. 

71.  Slater  Trust  Co.  v.  Gardiner,  47   Am.   St.   Rep.  489,  28  L.   R.  A. 
183    Fed.    Rep.    268.      See   Nash    v.  753,  and  see  Angus  v.  Clifford,  1891, 
Minnesota  Title  Insurance  &  Trust  2  Ch.   Div.  449,  472-473.     Compare 
Co.,  163  Mass.  574,  40  N.  E.  1039,  Flower   v.   Brumbach,   131   111.   646, 
47  Am.  St.  R.  489,  28  L.  R.  A.  753,  23  N.  E.  335,  affirming,  30  111.  App. 
and  cases  cited.     See  also  the  cases  294. 

cited  in  note  68,  supra.  If  the  prospectus  conveys  a  false 

72.  The  defendants  should  be  per-  impression  it  is  none  the  less  fraud- 
mitted  to  testify  in   regard  to   the  ulent     though     each     statement     Is 
sense  in  which  they  used  the  Ian-  literally  true.     See  ante,  §  227. 
guage  complained  of.    Nash  v.  Min-  73.  99    Wis.   214,   227,   74   N.   W. 
nesota  Title  Insurance  &  Trust  Co.,  976,  40  L.  R.  A.  837,  841. 

163  Mass.  574,  580,  40  N.  E.  1039,  74.  61  Pa.  202,  220,  100  Am.  Dec. 

628. 


426  THE  LAW  OF  PROMOTERS. 

In  Arkwright  v.  Newbold,75  the  court  held  that  a  statement  that 
"  the  remuneration  of  the  directors  will  be  fixed  by  the  share- 
holders, and  it  is  proposed  that  they  should  be  paid  only  by  a 
commission  on  the  profits  made,  no  promotion  money  whatever  be- 
ing paid  to  them  by  the  company,  and  all  formation  expenses  being 
paid  by  the  vendors  "  was  not  rendered  fraudulent  by  the  fact 
that  the  vendors  had  paid  a  large  sum  of  money  to  the  directors. 

In  Hayward  v.  Leeson,76  the  prospectus  contained  the  following 
statement,  "  The  capital  stock  of  this  company  represents  actual 
value  without  inflation,  but  does  not  approximate  the  entire  value 
of  the  properties  on  which  it  is  based.  It  was  the  intention  of  the 
projectors  and  incorporators  to  shape  this  enterprise  so  that  its 
stock  should  be  as  solid  as  that  of  a  national  bank."  This  state- 
ment was  held  to  be  misleading,  in  view  of  the  fact  that  of  the 
$2,000,000  of  the  outstanding  capital  stock  of  the  company, 
$700,000  had  been  issued  to  the  promoters  as  remuneration  for 
their  services,  or  as  their  profit  upon  the  sale,  to  the  company,  of 
certain  options. 

In  Bellairs  v.  Tucker,77  the  prospectus  of  a  company  organized 
to  take  over  a  French  patent  owned  by  one  Henley  stated  "  From 
the  success  attending  the  company  formed  for  the  working  of 
Henley's  English  patent  *  *  *  the  directors  feel  justified 
in  stating  they  confidently  believe  the  profits  of  this  company 
will  be  more  than  sufficient  to  pay  dividends  of  at  least  50 
per  cent  on  the  nominal  capital,  and  will  exceed  those  of  the 
company  working  the  English  patent,  which,  having  only  been 
formed  a  little  over  twelve  months,  has  entered  into  a  contract 
which  will  yield  the  return  by  way  of  annual  dividends  of  a  sum 
equal  to  the  whole  paid-up  capital  of  the  company."  It  was  held 
that  this,  under  all  the  circumstances,  did  not  amount  to  a  state- 

75.  L.  R,  17  Ch.  Div.  301.  77.  L.  R.  13  Q.  B.  D.  562,  572,  et 

76.  176  Mass.  310,  320-321,  57  N.      aeq. 
E.  656,  49  L.  R.  A.  725. 


FALSE  REPRESENTATIONS.  427 

ment  that  the  English  company  had  at  the  time  of  the  publication 
of  the  prospectus  already  had  a  trading  success  in  the  sense  of 
having  divided  profits,  but  merely  expressed  a  confident  belief  that 
the  English  company  would  make  dividends  of  a  certain  amount, 
and  that  the  French  company,  by  reason  of  more  favorable  condi- 
tions, would  make  even  larger  dividends. 

A  representation  that  a  corporation  taken  into  the  new  com- 
pany has  paid  dividends,  fairly  implies  that  such  dividends  have 
been  earned.78 

In  Tinker  v.  Kier,79  it  was  held  that  a  representation  that  the 
company  was  free  from  debt  was  misleading  in  view  of  the  fact 
that  the  sole  asset  of  the  corporation  was  subject  to  a  mortgage 
though  the  corporation  was  not  liable  for  the  debt. 

It  was  held  in  Bentinck  v.  Fenn  80  that  the  production  of  a  con- 
tract for  the  sale  of  property  between  the  legal  owner  on  the  one 
hand  and  the  corporation  on  the  other,  making  no  mention  of  the 
beneficial  owners,  did  not  amount  to  a  representation  that  the 
vendor  mentioned  in  the  contract  was  the  sole  owner  of  the  prop- 
erty and  that  the  party  producing  the  contract  had  no  interest 
therein. 

It  was  said  in  New  Sombrero  Phosphate  Co.  v.  Erlanger  81  that 
a  statement  that  "  the  directors  "  had  entered  into  a  provisional 
contract  for  the  purchase  of  property,  meant  that  a  contract  had 
been  entered  into,  or  at  least  approved,  by  all  the  five  directors  of 
the  company.  The  decision  was  correct  upon  the  particular  facts1 
as,  of  the  three  directors  who  had  acted,  two  were  subject  to  the 

78.  Downey  v.   Flnucane,  205  N.          80.  L.  R.  12  App.  Cas.  652,  663, 
T.  251,  98  N.  E.  391,  40  L.  R.  A.  N.      666.     Cf.    §  215,  ante. 

S.  307;  Ottinger  v.  Bennett,  203  N.  81.  L.  R.  5  Ch.  Div.   73,  112,  25 

Y.  554,  96  N.  E.  1123,  reversing,  144  W.   R.  436,  affirmed,  «M&  nom.  Er- 

N.  Y.  App.  Div.  525,  129  Supp.  819.  langer  v.  New  Sombrero  Phosphate 

See  also  Burnes  v.  Pennell,  2  H.  L.  Co.,  L.  R.  3  App.  Cas.  1218,  6  Eng. 

Cas.  497,  525.  Rul.  Cas.  777,  39  L.  T.  N.  S.  269, 

79.  195  Mo.  183,  94  S.  W.  501 ;  cf .  27  W.  R.  65. 
§  213,  ante. 


428  THE  LAW  OF  PROMOTERS. 

control  of  the  promoters,  but  a  statement  that  a  contract  had 
been  made  by  the  directors  would  not  ordinarily  mean  that  it  had 
been  made  with  the  unanimous  approval  of  the  entire  board. 

Other  cases  involving  the  interpretation  of  particular  state- 
ments are  cited  in  the  foot  note.82 

§  232.  Secret  profits  of  promoter  as  fraud  upon  subscribers. 

A  question  arises  as  to  whether  the  concealment  from  the  sub- 
scribers of  a  profit  made  by  the  promoters  may  be  made  the  basis 
of  an  action  for  fraud  and  deceit. 

A  promoter  is  under  an  obligation  to  disclose  to  the  subscribers 
any  profits  made  by  him  upon  the  promotion,83  and  the  subscribers 
are,  in  the  absence  of  notice  to  the  contrary,  entitled  to  assume 
that  no  such  profits  were  taken.84  If  the  promoter  induces  the 
subscribers  to  take  shares  by  intentionally  concealing  his  profits, 
he  is  guilty  of  a  fraudulent  concealment  which  may  be  made  the 
basis  of  an  action  of  fraud  and  deceit.85 

82.  Lehman-Charley    v.    Bartlett,  Co.  v.  Robinson,  18  L.  R.  A.  N.  S. 

135  N.  Y.  App.  Div.  674,  120  Supp.  1110.    And  see  ante,  §  112. 

501,  affirmed,  202  N.  Y.  524,  95  N.  83.  See  ante,  §§  89-90. 

E.  1125;  Wakeman  v.  Dalley,  51  N.  84.  See  ante,  §  90. 

Y.  27;  Downey  v.  Finucane,  205  N.  85.  The     authorities,     while    not 

Y.  251,  98  N.  E.  391,  40  L.  R.  A.  N.  wholly  satisfactory,  strongly  tend  to 

S.  307;  Smith  v.  Chadwick,  L.  R.  9  sustain   the   action   for  fraud.     De 

App.  Cas.  187,  198,  et  seq.,  5  Am.  &  Klotz  v.   Broussard,  203  Fed.  Rep. 

Eng.  Corp.  Cas.  23,  affirming,  L.  R.  942,  944,  122  C.  C.  A.  244 ;  Coulter 

20  Ch.  Div.  27,  46  L.  T.  N.  S.  702 ;  v.  Clark,  160  Ind.  311,  66  N.  E.  739 ; 

Hallows    v.    Fernie,    L.    R.    3    Ch.  Hinkley  v.  Sac  Oil  &  Pipe  Line  Co., 

App.  467 ;  New  Brunswick  &  Canada  132  Iowa  396,  405-406,   107  N.   W. 

Ry.  Co.  v.  Conybeare,  9  H.  L.  Cas.  629,    633,    119    Am.    St.    Rep.    564; 

711;  Glasier  v.  Rolls,  L.  R.  42  Ch.  Downey  v.  Finucane,  205  N.  Y.  251, 

Div.  436;  Green  v.  Gen'l  Prov.  Ass.  262,  98  N.  E.  391,  40  L.  R.  A.  N.  S. 

Co.,  Ltd.,  18  L.  T.  N..S.  500;  Aaron's  307;   Getty  v.  Donelly,  9  Hun    (N. 

Reefs  v.  Twiss,  1896,  App.  Cas.  273;  Y.)  603,  affirmed,  sub  nom.  Getty  v. 

Greenwood  v.  Leather  Shod  Wheel  Devlin,  70  N.   Y.  504;   Brewster  v. 

Co.,  1900,  1  Ch.  Div.  421 ;  Parbury's  Hatch,  122  N.  Y.  349,  25  N.  E.  505, 

Case,  19  Weekly  Rep.  584.  33    N.    Y.    St.    Rep.    527;    Wills    v. 

See  note  to  Lomita  Land  &  Water  Nehalem  Coal  Co.,  52  Or.  70,  76-77, 


FALSE  REPRESENTATIONS.  429 

The  fact  that  the  secret  profits  of  the  promoter  may  give  rise 
to  an  action  by  the  corporation  is  not  material.  The  remedies 
which  are  open  to  the  corporation  in  such  case  do  not  make  the 
subscribers  whole.  Their  complaint  is  that  they  accepted  their 
shares  upon  the  assumption  that  the  promoter  was  going  into  the 
company  upon  the  same  basis  as  themselves,  and  that  had  they 
known  that  the  promoter  was  going  in  on  a  preferential  basis  they 
would  not  have  subscribed  for  the  shares.  A  recovery  by  the  cor- 
poration affects  the  subscribers'  action  for  fraud  only  in  so  far 
as,  by  increasing  the  value  of  the  shares,  it  reduces  the  damages  of 
those  subscribers  who  still  hold  their  shares  at  that  time.86 

The  right  of  a  subscriber  to  rescind  his  subscription  because  of 
the  promoter's  secret  profits  is  considered  in  a  subsequent  chap- 
ter.87 

§  233.  Secret  profits   of  promoter  as  fraud  upon  subsequent 

purchasers  of  shares. 

A  question  somewhat  different  from  that  considered  in  the  pre- 
ceeding  section  arises  when  promoters,  instead  of  selling  the  shares 
of  the  corporation  to  original  subscribers,  cause  all  the  shares 

96  Pac.  528,  531 ;  Franey  v.  Warner,  The  question  is  in  England  largely 

96  Wis.  222,  235,  71  N.  W.  81,  85,  controlled  by  statute,  (Stat.  8,  Edw. 

followed  in  Hebgen  v.   Koeffler,  97  VII,  Ch.  69,  §  81).    In  re  South  of 

Wis.   313,  320,  72  N.  W.  745,  747-  England  Natural  Gas  &  Petroleum 

748;  Components  Tube  Co.  v.  Nay-  Co.,  Ltd.,  1911,  1  Ch.  Div.  573,  80 

lor,  1900,  2  Ir.  R.  1,  30-31.  L.  J.  Ch.  N.  S.  358.    And  see  ante,  § 

See  note  by  Freeman,  J.,  to  Pitts-  211. 

burg  Mining  Co.  v.  Spooner,  17  Am.  It  is  held  in  Priest  v.  Wliite,  89 

St.   Rep.   149,   at  pages  167  &  168,  Mo.  609,  1  S.  W.  361.  that  a  creditor 

quoted  in  part  in  Wills  v.  Nehalem  cannot,    because   of   the   promoter's 

Coal  Co.,  52  Or.  70,  85-86,  96  Pac.  fraud  upon   the  corporation,  main- 

528,  534.  tain  an  action  against  the  promoter 

Cf.  Arkwright  v.  Newbold,  L.  R.  for  fraudulently  inducing  the  credit. 

17  Ch.  D.  301,  also  McAleer  v.  Me-  As     to     fraudulent     concealment 

Murray,    6    Phila.    244;    Beatty    v.  generally,  see  ante,  §§  210-211. 

Neelon,  13  Can.  S.  C.  1,  19  Am.  &  86.  See  post,  §  249. 

Eng.   Corp.  Gas.  236,   and   perhaps  87.  See  post,  §  239. 
Caldwell  v.  Boyd,  57  Pa.  321. 


430  THE  LAW  OF  PROMOTERS. 

of  the  corporation  to  be  issued  to  themselves,  and  then  resell 
these  shares  to  the  public.  It  is  well  settled  that  the  secret  profits 
of  the  promoters  do  not  in  such  case  give  rise  to  any  action  by 
the  corporation,88  but  the  promoters  are,  in  case  of  fraud  in  the 
sale  of  the  shares,  liable  directly  to  the  purchasers.89  A  question 
upon  which  the  authorities  throw  but  little  light  is  that  as  to 
whether  a  failure  to  disclose  the  promoters'  profits  to  these  pur- 
chasers constitutes  an  actionable  fraud.90 

It  would  be  absurd  to  say  that  because  a  man  was  one  of  the 
promoters  of  a  corporation,  he  occupies  a  fiduciary  relation  to 
every  person  to  whom  he  subsequently  sells  shares.  The  obligation 
of  the  promoter  to  disclose  to  his  vendee  the  profit  gained  by  him 
upon  the  promotion  depends  upon  the  facts  of  the  particular  case. 

In  Foster  v.  Seymour,91  the  court  said  that  every  purchaser 
from  the  promoters  would  stand  upon  the  circumstances  of  his 
purchase,  and  would  have  a  cause  of  action  if  the  original  trans- 
action in  connection  with  the  special  facts  of  his  purchase  should 
operate  as  a  fraud  upon  him. 

In  Brewster  v.  Hatch,92  the  promoters  having  acquired  a  cer- 
tain mining  property  for  $242,000,  conveyed  it  to  their  corpora- 
tion, taking  its  entire  capital  stock  consisting  of  150,000  shares 
of  a  par  value  of  $10  each,  in  payment  therefor,  and  then  pro- 

88.  See  ante,  §  120,  et  seq.  seems  to  hold  that  there  is  no  cause 

89.  Old    Dominion    Copper,    etc.,  of  action  in  the  vendees.     See  also 
Co.  v.  Lewisohn,  210  U.   S.  206,  28  Brooker    v.    William    H.    Thompson 
Sup.  Ct.  634,  52  L.  Ed.  1025,  affirm-  Trust  Co.,  254  Mo.  125,  162,  162  S. 
ing,  148  Fed.  Rep.  1020,  79  C.  C.  A.  W.  187,  196,  but  see  perhaps  dictum 
534 ;   Tompkins  v.   Sperry,  Jones  &  in  Wills  v.  Nehalem  Coal  Co.,  52  Or. 
Co.,   96  Md.   560,   581,  583,   54   Atl.  70,  76-77,  96  Pac.  528,  531. 

254,  258;  Hutchinson  v.  Simpson,  92  91.  23  Fed.  Rep.  65.     Quoted  in 

N.   Y.    App.   Div.   382,   417,   420,   87  Blum    v.    Whitney,    185   N.    Y.    232, 

Supp.  369,   (dissenting  opinion)  ;  In  245,  77  N.  E.  1159.     See  also  Inland 

re  Ambrose  Lake  Tin  &  Copper  Min-  Nursery   &   Floral   Co.   v.   Rice,   57 

ing  Co.,  L.  R.  14  Ch.  Div.  390,  397.  Wash.  67,  106  Pac.  499. 

90.  Caldwell  v.  Boyd,  57  Pa.  321,  92.  122  N.   Y.  349,  25  N.  E.  505, 

33  St.  Rep.  527. 


FALSE  REPRESENTATIONS.  431 

ceeded  to  sell  some  of  these  shares  to  the  public  at  $4  a  share. 
The  purchasers  sued  the  promoters  for  damages.  The  court  said 
that  if  the  plaintiffs  were  simply  the  vendees  of  the  defendants  the 
action  could  not  be  maintained,  but  if  the  defendants  stood  in  a 
fiduciary  relation  to  the  plaintiffs  the  liability  existed,  and  that 
"  the  plaintiffs  were  led  to  believe,  and  had  the  right  to  believe, 
from  the  documents  and  from  the  circumstances  that  the  defend- 
ants were  acting  in  the  interests  of  all  of  the  investors,  and  that 
they  knew  that  the  plaintiffs  so  believed.  These  defendants  were 
the  promoters  of  the  corporation  and  occupied,  before  its  organ- 
ization, a  position  of  trust  and  confidence  towards  those  whom  they 
induced  to  invest  in  the  enterprise.  It  is  conceded  and  found  by 
the  court  that  the  defendants  did  not  disclose  the  amount  which 
they  were  to  pay  for  the  mines,  or  the  fact  that  they  did  not  intend 
to  exercise  their  options,  unless  sufficient  funds  were  furnished  by 
others  to  pay  for  the  property  and  all  of  the  expenses  of  organ- 
izing the  corporation,  leaving  for  distribution  among  themselves  a 
majority  of  the  stock.  It  is  clear,  we  think,  that  if  the  defendants 
had  avowed  their  purpose,  the  plaintiffs  would  not  have  taken  an 
interest  in  the  enterprise,  and  that  they  are  liable  for  the  damages 
sustained  by  the  plaintiffs  who  were  induced  to  invest  in  shares  to 
be  issued." 

In  Re  Ambrose  Lake  Tin  &  Copper  Mining  Co.,93  the  court, 
after  stating  that  no  action  could  be  maintained  on  behalf  of  the 
company,  based  upon  a  transaction  in  which  the  vendors  trans- 
ferred their  property  to  the  corporation  at  a  gross  overvaluation 
taking  the  entire  capital  stock  in  payment,  said :  "  If  anybody  who 
had  shares  in  the  new  company  has  sold  those  shares  to  anybody 
of  the  outside  public  upon  the  faith  of  those  documents  which  are 
contained  in  these  articles  of  association  or  memorandum, — if 
they  have  sold  their  shares  on  the  faith  of  that  simulated  agree- 
ment for  the  purchase  of  the  mine  being  a  true  one,  it  seems  to 

93.  L.   R.  14  Ch.  Div.  390,  397.      See  also  Langdon  v.  Fogg,  18  Fed. 

Rep.  5,  8. 


432  THE  LAW  OF  PROMOTERS. 

me  they  have  obtained  the  money  from  those  purchasers  by  fraud. 
To  shew  that,  it  must  be  shewn  that  a  vendor  of  shares  in  the 
company  did  sell  to  the  purchasers  shares  in  the  company,  and 
that  the  persons  who  bought  the  shares,  purchased  them  on  the 
faith  of  this  agreement,  and  the  representations  made  in  it.  If 
that  should  ever  be  proved,  that  would  give  a  remedy  to  any  per- 
son who  has  so  been  deceived  against  the  person  who  made  these 
representations  to  him,  that  is,  against  the  individual." 

In  Tompkins  v.  Sperry  Jones  &  Co.,94  the  court* said,  "  When 
Sperry  &  Jones  offered  any  of  the  bonds,  or  stock  issued  to  them 
by  the  company  for  barter  or  sale  to  other  persons  and  thus  as 
it  were  invited  them  to  become  interested  in  the  enterprise  they 
were  bound  as  we  have  already  said  to  practice  no  concealments 
towards  those  persons  and  to  give  them  all  desired  information  as 
to  their  own  relation  to  the  company." 

Some  authorities  seem  to  indicate  that  the  purchaser  of  shares 
has  a  right  to  assume  that  the  property  purchased  by  the  corpo- 
ration was  worth  the  par  value  of  the  stock  issued  in  payment 
therefor,  and  that  the  concealment  of  the  fact  that  this  is  not  so, 
operates  as  a  misrepresentation.95  This  proposition  is,  however, 
open  to  serious  question.96 

The  proper  rule  seems  to  be  that  the  responsibility  of  the  pro- 
moter to  the  vendee  of  his  shares  depends  in  each  case  upon  the 
question  whether  the  vendee  was,  under  all  the  circumstances  of 
the  transaction,  entitled  to  assume  that  the  promoter  was  deriving 
no  personal  profit  from  the  promotion. 

94.  96  Md.  560,  583,  see  also  581,  surance  Press  v.  Montauk  Wire  Co., 
54  Atl.  254,  258,  see  also  257-258.  103   N.    Y.    App.    Div.    472,   479,   93 

95.  Old    Dominion    Copper,    etc.,  Supp.   134)  ;   cf.   Warner  v.   Benja- 
Co.  v.  Bigelow,  203  Mass.  159,  194-  min,  89  Wis.  290,  62  N.  W.  179. 

195,  89  N.  E.  193,  40  L.  R.  A.  N.  S.  And  see,  as  to  bondholders,  Man- 

314;  Hutchinson  v.  Simpson,  92  N.  hattan  Trust  Co.  v.  Seattle  Coal  & 

Y.   App.   Div.   382,  417,    (dissenting  Iron  Co.,  19  Wash.  493,  502-503,  53 

opinion  of  Hatch,  J.),   see  also  p.  Pac.  951,  955. 

420,  87  Supp   369.     (Quoted  in  In-  96.  See  ante,  §§  100,  110,  -165. 


FALSE  REPRESENTATIONS.  433 

§  234.  Misrepresentations  giving  rise  to  action  by  corporation. 
False  representations  made  by  the  promoters  in  a  prospectus  or 
otherwise,  generally  relate  to  the  sale  of  shares  of  the  corporation, 
and  the  litigations  which  result  therefrom  are,  in  the  main,  suits 
by  the  subscribers  for,  or  purchasers  of,  these  shares.  False  repre- 
sentations of  the  promoters  may,  however,  sometimes  give  rise 
to  an  action  by  the  company  in  its  corporate  capacity.  To  sus- 
tain an  action  by  the  corporation  it  must  appear  that  the  repre- 
sentations were  made  with  intent  to  induce  some  corporate  action, 
that  such  action  was  induced  thereby,  and  that  damage  to  the 
corporation  resulted  therefrom.97  It  is  not  necessary  in  order  to 
give  rise  to  an  action  by  the  corporation  that  the  representations 
complained  of  should  have  been  made  to  its  officers  or  directors. 
If  representations  are  made  with  the  purpose  of  inducing  persons 
to  organize  a  corporation  to  take  over  certain  property,  or  to 
enter  upon  particular  engagements,  and  the  persons  deceived  do, 
in  reliance  upon  the  representations  made,  organize  the  corporation 
and  cause  it  to  take  the  contemplated  action,  it  may  fairly  be  said 
that  the  representations  were  made  with  intent  to  deceive  the  cor- 
poration, that  it  was  deceived  thereby,  and  acted  thereon  to  its 
damage.98 


97.  See  Flagler  Engraving  Co.  v.  In     Economy     Powder     Co.     v. 

Flagler,  19  Fed.  Rep.  468;  Hutchln-  Boyer,  2  Berks    (Pa.)   131,  It  was 

son  v.  Simpson,  92  N.  Y.  App.  Div.  held  that  a  promoter  who  had  in- 

382,  405,  87  Supp.  369 ;  Patterson  v.  duced  other  subscribers  to  come  into 

Franklin,  176  Pa.  612,  35  Atl.  205;  the   company   by   representing  that 

Erlanger    v.    New    Sombrero   Phos-  he,  the  promoter,  had  paid  the  same 

phate  Co.,  L/.  R.  3  App.  Gas.  1218,  price  for  his  shares,  was  in  an  ac- 

1264,  1274,  6  Eng.  Rul.  Cas.  777,  39  tion   by   the  corporation   compelled 

L.  T.  N.  S.  269,  27  W.  R.  65;  Over-  to    make   that    representation   good 

end  &  Gurney  Co.  v.  Gibb,  L.  R.  5  by  paying  the  difference  between  the 

H.  L.  480.  price  paid  by  him  and  the  price  paid 

As  to   representations  in  regard  by  the  other  subscribers, 

to  promoters'   profits,  see  ante,   §§  98.  Cortes    Co.    v.    Thannhauser, 

198,  117,  108.  45  Fed.  Rep.  730,  and  see  Dicker- 


434  THE  LAW  OF  PROMOTERS. 

If  the  representations  are  made  with  the  view  to  inducing  the 
parties  addressed  to  subscribe  for  shares  in  the  corporation  and 
so  make  possible  the  corporate  action,  the  representations  are  like- 
wise, in  effect,  made  to  induce  corporate  action,  and  if  it  acts 
thereon  to  its  damage,  and  the  other  elements  of  fraud  are  pres- 
ent, there  is  a  sufficient  basis  for  a  suit  by  the  corporation." 
Whether  the  corporation  would,  in  such  case,  have  a  cause  of  ac- 
tion even  though  it  was  represented  by  an  independent  board  of 
directors  which  acted  with  full  knowledge  of  the  fac£s,  is  an 
academic  question,  as  promoters  attempting  to  commit  a  fraud 
upon  the  corporation  do  not,  in  practice,  furnish  the  company 
with  a  competent,  independent  and  fully  informed  directorate. 

The  fact  that  the  representations  complained  of  were  contained 
•in  a  prospectus  issued  by  the  company  after  its  formation  and 
even  after  the  contract  for  the  purchase  of  the  property  misrepre- 
sented was  executed,  would  not  necessarily  save  the  promoters 
from  liability  to  the  corporation  if  they  were  responsible  for  the 
prospectus,  and  the  subscriptions  which  made  possible  the  con- 
summation of  the  contract  were  induced  thereby.1 

Though  a  misrepresentation  be  of  such  character  that  it  might 
be  made  the  basis  of  a  suit  by  the  corporation,  the  persons  de- 
man  v.  Northern  Trust  Co.,  176  TJ.  moter's  purchase.  See  also  Swarth- 
S.  181,  204,  20  Sup.  Gt.  311,  319,  44  more  Lumber  Co.  v.  Parks,  72  W. 
L.  Ed.  423,  quoting  Morawetz  on  Va.  625,  79  S.  E.  723;  Ettar  Realty 
Corporations  (2nd  Ed.),  §  546;  Co.  v.  Cohen,  163  N.  Y.  App.  Div. 
Scholfleld  Gear  &  Pulley  Co.  v.  409,  148  Supp.  625. 
Scholfield,  71  Conn.  1,  40  Atl.  1046.  99.  Lindsay  Petroleum  Co.  v. 

Cf.  Lebanon  Steam  Laundry  v.  Hurd,  L.  R.  5  P.  C.  221;  Hichens  v. 
Dyckman,  22  Ky.  L.  Rep.  348,  57  Congreve,  4  Russ.  562,  and  see  Cali- 
S.  W.  227,  where  the  purchase  of  fornia-Calaveras  Mining  Co.  v. 
the  property  by  the  promoter  was  Walls,  —  Cal.  — ,  149  Pac.  595.  And 
induced  by  false  representations,  see  post,  §§  285-286,  291. 
and  it  was  held  that  an  action  by  1.  Lagunas  Nitrate  Co.  v.  La- 
the corporation  would  not  lie.  It  gunas  Syndicate,  1899,  2  Ch.  Div. 
does  not,  however,  appear  from  the  392,  428,  431,  436;  cf.  Overend 
report  that  a  corporation  was  con-  &  Gurney  Co.  v.  Gibb,  L.  R.  5  H. 
templated  at  the  time  of  the  pro-  L.  480. 


FALSE  REPRESENTATIONS. 


435 


ceived  can  nevertheless  recover  their  individual  damages  from  the 
guilty  parties  without  making  the  corporation  a  party  to  the 
suit.2 


2.  Austin  v.  Murdock,  127  N.  C. 
454,  37  S.  E.  478. 

In  Sigafus  v.  Porter,  84  Fed.  Rep. 
430,  434,  28  C.  C.  A.  443,  51  U.  S. 
App.  693,  (reversed  on  another 
ground,  179  U.  S.  116,  21  Sup.  Ct. 
34,  45  L.  Ed.  113),  the  parties  who 


purchased  property  with  a  view  to 
its  transfer  'to  the  corporation  to  be 
formed,  were  permitted  to  sue  on  be- 
half of  themselves  and  their  asso- 
ciates who  had  agreed  to  join  in 
the  purchase  and  take  shares  in  the 
company  to  be  formed. 


CHAPTER  XII. 

OF  THE  PERSONAL  REMEDIES  OF  STOCKHOLDERS. 

Section  235.  Introductory. 

236.  Action  for  fraud  and  deceit. 

237.  Accounting  for  profits. 

238.  Rescission  of  subscription.  „ 

239.  Rescission  because  of  secret  profit  of  promoter. 

240.  Restoration  of  status  quo  as  condition  of  rescission. 

241.  Methods  of  effectuating  rescission. 

242.  Joinder  of  actions. 

243.  Joinder  of  parties. 

§  235.  Introductory. 

A  promoter's  fraud  may,  according  to  its  nature,  constitute  an 
injury  to  the  corporation,  or  an  injury  to  the  subscribers  or  pur- 
chasers of  its  shares,  or  an  injury  to  the  corporation  and  to  the 
subscribers  and  purchasers  as  well.  The  remedies  of  the  corpora- 
tion, to  be  pursued  by  it  or  on  its  behalf,  have  already  been*  con- 
sidered.1 The  means  of  redress  open  to  the  subscribers  or  the 
purchasers  of  the  company's  shares,  for  the  wrongs  done  them  in 
their  individual  capacity,  are  the  subject  of  this  chapter.2 

§  236.  Action  for  fraud  and  deceit. 

A  person  induced  by  the  fraudulent  representations  of  the  pro- 
moters to  subscribe  for,  or  purchase,  the  shares  of  the  company, 
may  sue  the  promoters  for  damages  in  a  common  law  action  of 
fraud  and  deceit.3 

1.  See'  ante,  Chapters  IX  &  X.  Iowa  113,  40  N.  W.  96,  1  L.  R.  A. 

2.  On  this  subject  generally,  see  664 ;  Hess  v.  Draffen,  99  Mo.  App. 
note  to  Lomita  Land  &  Water  Co.  580,  74  S.  W.  440;  Getty  v.  Devlin, 
v.  Robinson,  18  L.  R.  A.  N.  S.  1125-  54    N.     Y.    403,    415 ;     Paddock    v. 
1131.  Fletcher,    42    Vt.    389;    Franey    v. 

3.  Teachout    v.    Van    Hoesen,    76  Warner,  96  Wis.  222,  235,  71  N.  W. 

(436) 


REMEDIES  OF  STOCKHOLDERS. 


437 


While  a  corporation  is,  according  to  the  modern  view,  liable  for 
the  fraud  of  its  agents,4  and  cases  may  arise  in  which  a  corpora- 
tion would  be  liable  for  fraud  and  deceit  in  the  sale  of  its  own 
shares,5  a  corporation  cannot  very  well  be  held  liable  in  damages 
for  the  fraudulent  representations  of  its  promoters;  for  the  pro- 
moters are  not,  as  such,  the  agents  of  the  corporation.  To  hold  the 
corporation  liable  it  would  have  to  be  shown  that  the  parties  mak- 
ing the  representations  complained  of  were  authorized  by  the  cor- 
poration to  act  on  its  behalf,  or  that  the  company  in  some  way 
adopted  the  representations.  While  it  has  been  held  that  a  prin- 
cipal by  accepting  a  contract  procured  by  an  unauthorized  agent, 


81,  85,  see  also  dictum  in  New 
Sombrero  Phosphate  Co.  v.  Er- 
langer,  L.  R.  5  Ch.  Div.  73,  121- 
122,  25  W.  R.  436. 

As  to  maintaining  such  action  in 
equity,  see  Hill  v.  Lane,  L.  R.  11 
Eq.  215;  Peek  v.  Gurney,  L.  R.  6 
H.  L.  377,  390;  Squiers  v.  Thomp- 
son, 73  N.  Y.  App.  Div.  552,  76  Supp. 
734,  11  Ann.  Gas.  160,  affirmed,  with- 
out opinion,  172  N.  Y.  652,  65  N.  E. 
1122.  And  see  ante,  §  193,  171n. 

It  is  not  necessary  to  join  the 
corporation  as  a  party  defendant, 
or  to  first  request  the  corporation 
to  take  action.  Austin  v.  Murdock, 
127  N.  C.  454,  37  S.  E.  478. 

In  Beatty  v.  Neelon,  13  Can.  S. 
C.  1,  19  Am.  &  Eng.  Corp.  Gas.  236, 
where  the  parties  agreed  to  com- 
bine their  steamship  lines  and  to 
organize  a  corporation  to  operate 
them,  a  false  representation  made 
by  one  of  the  parties  in  regard  to 
certain  mail  contracts  assigned  to 
the  company  was  held  to  give  rise 
to  no  action  in  the  other  parties,  the 
court  saying  that  the  injury  was  to 
the  corporation. 


It  should  be  noted  that  the  pur- 
chasers of  shares  in  the  open  mar- 
ket, as  distinguished  from  the  sub- 
scribers for  the  shares,  are  not  or- 
dinarily entitled  to  relief  because  of 
the  false  representations  contained 
in  a  prospectus.  See  ante,  §  200. 

4.  Hindman     v.     First     National 
Bank,   98  Fed.   Rep.   562,  39  C.   C. 
A.  1,  48  L.  R.  A.  210 ;  same  v.  same, 
112  Fed.  Rep.  931,  50  C.  C.  A.  623, 
57  L.  R.  A.  108;  Benedict  v.  Guar- 
dian Trust  Co.,  58  N.  Y.  App.  Div. 
302,  68   Supp.  1082,  91  N.   Y.   App. 
Div.  103,  86  Supp.  370,  affirmed,  180 
N.  Y.  558,  73  N.  E.  1120. 

Lindley  on  Companies,  (6th  ed.), 
p.  266;  Cook  on  Corporations,  (7th 
ed.),  §  15-B,  compare,  however,  § 
157  of  the  same  work. 

5.  See,  however,  Wilson  v.  Hund- 
ley, 96  Va.   96,   105,  30   S.   E.  492, 
495,  70  Am.  St.  Rep.  837;  Houlds- 
worth  v.  City  of  Glasgow  Bank,  L. 
R.   5   App.   Gas.   317;   New   Bruns- 
wick  &    Canada    Ry.,    etc.,    Co.    v. 
Conybeare,  9  H.  L.  Gas.  711,  749; 
In  re  Addlestone  Linoleum  Co.,  L. 
R.  37  Ch.  Div.  191. 


438  THE  LAW  OF  PROMOTERS. 

adopts  the  representations  of  such  agent,  and  may,  in  a  proper 
case  be  held  liable  for  damages  for  fraud  and  deceit,6  the  appli- 
cation of  this  principle  to  a  corporation  accepting  subscriptions 
procured  by  its  promoters,  is  a  matter  of  some  difficulty,  at  least 
where  the  representations  were  made  before  the  corporation 
achieved  legal  existence.7  A  rescission  of  the  subscription  is,  when 
a  judgment  against  the  corporation  is  desired,  generally  the  more 
satisfactory  remedy,  and  for  that  reason,  perhaps,  relief  in  dam- 
ages against  the  corporations  is  not  generally  sought. 

§  237.  Accounting  for  profits. 

A  subscriber  for  the  company's  shares  can,  under  certain  cir- 
cumstances, compel  the  promoters  to  account  directly  to  him, 
instead  of  to  the  corporation,  for  the  secret  profits  unlawfully 
taken  by  them. 

In  Krohn  v.  Williamson,8  the  promoters  of  a  bridge  company, 
after  its  capital  stock  of  $1,500,000  had  been  subscribed,  made 
a  contract  for  the  construction  of  the  proposed  bridge,  under  an 
agreement  that  the  contractor  should  receive  $1,000,000  in  bonds 
and  $1,500,000  in  stock,  the  subscribers  assenting  that  the  stock 
subscribed  for  by  them  should  be  so  used  by  the  corporation,  and 
the  contractor  agreeing  to  return  to  the  promoters  and  subscrib- 
ers, $200,000  par  value  of  such  stock.  Two  of  the  promoters  then 
entered  into  an  agreement  with  the  contractor  to  procure  for  the 
corporation  title  to  the  land  necessary  for  the  bridge  approaches, 

6.  See  Busch  v.  Wilcox,  82  Mich.      Imp.    Co.,    103   Ky.   529,   45   S.   W. 
336,  47  N.  W.  328,  21  Am.  St.  Rep.      779,  and  see  ante,  §  50. 

563,  affirming  on  rehearing,  82  As  to  the  rescission  of  a  sub- 
Mich.  315,  46  N.  W.  940;  Spotten  scription  induced  by  the  false  rep- 
v.  DeFreest,  140  N.  Y.  App.  Div.  resentations  of  a  promoter,  see  post, 
792,  125  Supp.  497;  Green  v.  Des  §  238. 

Carets,    210   N.    Y.    79,    103    N.    E.  8.  62  Fed.  Rep.  869,  affirmed,  sub 

964;    Lowance    v.    Johnson,    —   W.  nom.  Williamson  v.  Krohn,  66  Fed. 

Va.  — ,  84  S.  E.  937.  Rep.  655,  13  C.  C.  A.  668,  31  U.  S. 

7.  See    Oldham    v.    Mt.    Sterling  App.  325. 


REMEDIES  OF  STOCKHOLDERS.  439 

in  consideration  of  which  these  promoters  were  to  receive  $300,000 
in  bonds  and  $600,000  in  stock.  As  anticipated  by  all  concerned, 
the  promoters  purchased  the  necessary  lands  for  less  than  $300,- 
000.  They  retained  the  $600,000  in  stock  as  their  profit  upon  the 
transaction.  Judge  Taft  held  that  the  real  agreement  between 
the  promoters  and  the  corporation,  was  that  the  bridge  should  be 
built  for  the  bonds  and  as  much  less  than  the  $1,500,000  of  capital 
stock  as  possible,  and  that  whatever  was  left  of  the  stock  was  to  be 
divided  among  the  promoters  and  subscribers  in  proportion  to  their 
interest  in  the  enterprise.  That  the  promoters  must,  therefore, 
account  to  the  subscribers  for  the  $600,000  of  stock  received  from 
the  contractor. 

In  Emery  v.  Parrott,9  the  defendant  Head,  having  been  em- 
ployed as  agent  to  sell  a  mine,  agreed  with  the  defendant  Parrott 
that  if  the  latter  would  organize  a  corporation  to  purchase  the 
mine  he,  Head,  would  share  his  commissions  with  Parrott.  Par- 
rott thereupon  induced  the  four  plaintiffs  to  join  with  him  in  or- 
ganizing a  corporation  to  purchase  the  mine,  making  no  mention 
of  the  commission  to  be  received  by  him.  The  plaintiffs,  upon  dis- 
covering the  facts,  compelled  Head  and  Parrott  to  account  to  them, 
for  their  commissions. 

Judge  Freeman  in  an  extended  note  to  the  case  of  Pittsburg; 
Mining  Co.  v.  Spooner,10  after  reviewing  the  authorities,  comes  to- 
the  conclusion  that  "  the  authorities  *  *  *  establish  that 
the  wrong  done  by  promoters  may  be  regarded  either  as  a  wrong 
to  the  corporation  or  to  the  stockholders  therein,  whether  they 
became  such  before  or  after  the  transaction  complained  of,  if  they 
acted  in  innocence  of  the  fraud  with  which  it  was  tainted.  Redress 
may,  therefore,  be  had  either  at  the  suit  of  the  corporation  or  any 
of  its  shareholders.  *  *  *  *  *  If  the  suit  is  by  an  indi- 
vidual shareholder,  of  course  his  recovery  must  be  limited  to  the 

9.  107  Mass.  95.  v.  Nehalem  Coal  Co.,  52  Or.  70,  86, 

10.  17  Am.  St.  Rep.  149,  at  pages      96  Pac.  528,  534. 
167  and  168,  quoted  in  part  in  Wills 


440  THE  LAW  OF  PROMOTERS. 

amount  of  his  individual  injury,  and  this  must  be  either  the  addi- 
tional sum  which  he  has  paid  for  his  stock  over  and  above  what  he 
would  have  been  required  to  pay  for  it  but  for  the  secret  and 
fraudulent  transaction  or  bonus  of  which  he  complains,  or  the 
additional  profits  to  which  he  would  become  entitled,  if  the  defend- 
ants were  compelled  to  account  to  the  corporation  for  the  bonus 
or  profits  improperly  received  by  them." 

This  statement  of  the  law,  while  supported  by  some  authorities,11 
is  perhaps  too  broad.  The  promoters'  profits  ordinarily  be- 
long to  the  corporation  and  should  be  accounted  for  to  it,  and  not 
to  the  subscribers.  An  accounting  directly  to  the  subscribers  may 
be  compelled  where  the  subscribers  joined  in  the  purchase  of  prop- 
erty subsequently  transferred  to  the  corporation,  and  the  unlawful 
profits  of  the  promoters  were  gained  by  a  fraud  arising  out  of 
such  purchase  and  transfer  12  or  where  other  facts  exist  which 
justify  the  conclusion  that  the  promoters'  profits  were  taken  from 
the  subscribers  rather  than  from  the  corporation.13 

§  238.  Rescission  of  subscription. 

While  the  promoters  are  not  as  such  the  agents  of  the  corpo- 
ration, and  the  corporation  cannot  ordinarily  be  held  liable  in 
damages  for  their  fraudulent  representations,14  the  corporation 
will  not  be  allowed  to  repudiate  the  promoters'  fraud  and  at  the 
same  time  insist  upon  the  payment  of  the  subscriptions  that  re- 
sulted therefrom.  A  misrepresentation  by  the  promoters  of  a 

11.  Franey    v.    Warner,    96    Wls.          Michigan. — Barbour    v.    Hurlburt, 
222,  235,  71  N.  W.  81,  85;  Hebgen      137  Mich.  534,  100  N.  W.  781. 

v.  Koeffler,  97  Wis.  313,  72  N.  W.  Missouri.— Garrett   v.   Wannfried, 

745.  67  Mo.  App.  437. 

12.  California. — Mattern  v.  Cana-  New  York.— Getty  v.  Devlin,  54  N. 
van,  3  Gal.  App.  493,  86  Pac.  618.  Y.  403,  415,  70  N.  Y.  504. 

Illinois. — Maxwell  v.  McWilliams,          13.  Hall  v.  Grayson  County  Nat'l 
145  111.  App.  155.  Bank,  36  Tex.  Civ.   App.  317,  331- 

Massachusetts.— D  o  1  e  v.  Wool-  332,  81  S.  W.  762,  770,  and  see  cases 
dredge,  135  Mass.  140.  cited  in  preceding  notes. 

14.  See  ante,  §  236. 


REMEDIES  OF  STOCKHOLDERS. 


441 


material  fact  is,  if  relied  upon  by  the  subscriber,  ground  for  the 
rescission  of  his  subscription.15     A  sxibscription  cannot,  however, 


15.  Federal. — Upton  v.  Englehart,  j 
3  Dill.  (U.  S.)  496,  28  Fed.  Gas.  16, ' 
800;    Alger    v.    Anderson,    78    Fed. 
Rep.  729,  and  cases  cited ;  Barcus  v. 
Gates,  89   Fed.   Rep.   783,  32  C.   C. 
A.  337,  61  U.  S.  App.  596;  Banque 
Franco-Egyptienne     v.     Brown,     34 
Fed.  Rep.  162,  193. 

Georgia. — Stewart  v.  Rutherford, 
74  Ga.  435. 

Iowa. — Hinkley  v.  Sac  Oil  & 
Pipe  Line  Co.,  132  Iowa  396,  107 
N.  W.  629,  119  Am.  St.  R.  564; 
Davis  v.  Dumont,  37  Iowa  47. 

Michigan. — Sherman  v.  American 
Stove  Co.,  85  Mich.  169,  48  N.  W. 
537. 

Missouri. — Van  Noy  v.  Central 
Union  Fire  Ins.  Co.,  168  Mo.  App. 
287,  153  S.  W.  1090. 

New  Jersey. — Vreeland  v.  New 
Jersey  Stone  Co.,  29  N.  J.  Eq.  188, 
affirmed,  29  N.  J.  Eq.  651. 

New  York. — Talmadge  v.  Sanitary 
Security  Co.,  31  App.  Div.  498,  52 
Supp.  139 ;  Mack  v.  Latta,  178  N.  Y. 
525,  71  N.  E.  97,  67  L.  R.  A.  126; 
Lehman-Charley  v.  Bartlett,  135 
App.  Div.  674,  120  Supp.  501,  af- 
firmed, 202  N.  Y.  524,  95  N.  E.  1125; 
Walker  v.  Anglo-American  Mortgage 
&  Trust  Co.,  72  Hun  334,  55  St.  Rep. 
54,  25  Supp.  432;  McDermott  v. 
Harrison,  56  Hun  640,  9  Supp.  184, 
30  St.  R.  324. 

Virginia. — Crump  v.  United  States 
Mining  Co.,  7  Gratt  352,  368-369,  56 
Am.  Dec.  116;  Jordan  v.  Annex 
Corporation,  109  Va.  625,  64  S.  E. 
1050,  17  Am.  &  Eng.  Ann.  Cas.  267; 


Bosher  v.  Richmond  &  H.  L.  Co., 
89  Va.  455,  16  S.  E.  360;  Carey  v. 
Coffee  Stemming  Mach.  Co.,  20  S. 
E.  778. 

Washington. — M  ulholland  v. 
Washington  Match  Co.,  35  Wash. 
315,  77  Pac.  497,  citing  Cook  on 
Stock  &  Stockholders,  3rd  Ed.,  § 
140  and  143,  and  Thompson's  Com- 
mentaries on  the  Law  of  Corpora- 
tions, Vol.  1,  §  452. 

West  Virginia. — Cox  v.  National 
Coal  &  Oil  Investment  Co.,  61  W. 
Va.  291,  308,  56  S.  E.  494,  501. 

Wisconsin. — Waldo  v.  Chicago,  St. 
Paul  &  Fond  du  Lac  R.  R.  Co.,  14 
Wis.  575. 

United  Kingdom  and  Colonies. — 
Oakes  v.  Turquand,  L.  R.  2  H.  L. 
325,  344,  and  cases  cited,  affirming, 
In  re  Overend,  Gurney  &  Co.,  L.  R. 
3  Eq.  576,  623;  Henderson  v.  Lacon, 
L.  R.  5  Eq.  249,  261,  17  L.  T.  N.  S. 
527;  Blake's  Case,  34  Beav.  639,  34 
L.  J.  Ch.  N.  S.  278,  13  W.  R.  486; 
Western  Bank  of  Scotland  v.  Addie, 
L.  R.  1  Sc.  &  D.  App.  Cas.  145,  158, 
163,  166;  Karberg's  Case,  1892,  3 
Ch.  Div.  1,  66  L.  T.  N.  S.  184 ;  In  re 
Canadian  Direct  Meat  Co.,  1892,  W. 
N.  146,  reversing,  1892,  W.  N.  94; 
Directors  of  Central  Ry.  Co.  of 
Venezuela  v.  Kisch,  L.  R.  2  H.  L. 
99,  16  L.  T.  N.  S.  500;  Cover's 
Case,  L.  R.  1  Ch.  Div.  182,  189,  198, 
affirming,  L.  R.  20  Eq.  114;  In  re 
British  Seamless  Paper  Box  Co.,  L. 
R.  17  Ch.  Div.  467,  479;  Twycross 
v.  Grant,  L.  R.  2  C.  P.  D.  469,  543 ; 
Smith's  Case,  L.  R.  2  Ch.  App.  604, 


442 


THE  LAW  OF  PROMOTERS. 


be  rescinded  merely  because  of  statements  made  by  an  unauthor- 
ized intermeddler.16 


609,  affirmed,  sub  nom,  Reese  River 
Silver  Min.  Co.  v.  Smith,  L.  R.  4 
H.  L.  64;  Capel  &  Co.  v.  Sim's 
Ships  Composition  Co.,  57  L.  J.  Ch. 
N.  S.  713;  Ross  v.  Estates  Invest- 
ment Co.,  L.  R.  3  Eq.  122,  affirmed, 
L.  R.  3  Ch.  App.  682 ;  In  re  Pacaya 
Rubber  &  Produce  Co.,  Ltd.,  1914, 
1  Ch.  Div.  542,  554,  83  L.  J.  Ch. 
N.  S.  432,  110  L.  T.  N.  S.  578,  30 
T.  L.  R.  260;  Components  Tube  Co. 
v.  Naylor,  1900,  2  Ir.  R.  1,  74. 

See  also  cases  cited  under  §  239, 
note  28,  and  see  ante,  §  209. 

Cf.  Goodrich  v.  Reynolds,  etc., 
Co.,  31  111.  490,  83  Am.  Dec.  240, 
and  cases  cited;  Rutz  v.  Esler,  etc., 
Mfg.  Co.,  3  111.  App.  83;  Shick  v. 
Citizens'  Enterprise  Co.,  15  Ind. 
App.  329,  44  N.  E.  48,  57  Am.  St. 
R.  230;  Oldham  v.  Mt.  Sterling 
Imp.  Co.,  103  Ky.  529,  45  S.  W. 
779;  St.  Johns  Mfg.  Co.  v.  Munger, 
106  Mich.  90,  64  N.  W.  3,  29  L.  R. 
A.  63,  58  Am.  St.  R.  468;  Wood 
Harvester  Co.  v.  Jefferson,  71  Minn. 
367,  74  N.  W.  149;  Commonwealth 
Bonding  &  Casualty  Ins.  Co.  v. 
Cator,  —  Tex.  Civ.  App.  — ,  175  S. 
W.  1074;  Pulsford  v.  Richards,  17 
Beav.  87,  95;  Ex  parte  Worth,  4 
Drew.  529;  Mixer's  Case,  4  DeG. 
&  J.  575;  Bernard's  Case,  5  DeG. 
&  Sm.  283;  Dodgson's  Case,  3  DeG. 
&  Sm.  85;  Ayre's  Case,  25  Beav. 
513,  4  Jur.  N.  S.  596,  27  L.  J.  Ch. 
N.  S.  579;  Lynde  v.  Anglo-Italian 
Hemp  Spinning  Co.,  1896,  1  Ch. 
Div.  178;  Parbury's  Case,  3  DeG. 
&  Sm.  43;  Holt's  Case,  22  Beav.  48; 


Lord  Lurgan's  Case,  1902,  1  Ch.. 
Div.  707;  Sleigh  v.  Glasgow  & 
Transvaal  Options,  Ltd.,  Sess.  Gas. 
6  Fraser  420,  428. 

See  note  to  Fear  v.  Bartlett,  33 
L.  R.  A.  721,  728-729. 

The  subscriber  should  not  be  given 
i  a  lien  on  the  company's  property  to 
secure  the  repayment  of  the  sub- 
scription moneys.  Lehman-Charley 
v.  Bartlett,  135  N.  Y.  App.  Div. 
674,  684,  120  Supp.  501,  affirmed, 
202  N.  Y.  524,  95  N.  E.  1125. 

The  fact  that  an  action  would 
lie  at  law  for  fraud  and  deceit, 
does  not  bar  the  remedy  in  equity. 
Negley  v.  Hagerstown  Mfg.  Min.  & 
Land  Imp.  Co.,  86  Md.  692,  39  Atl. 
506. 

It  is  held  in  Re  Devala  Provident 
Gold  Min.  Co.,  L.  R.  22  Ch.  Div. 
593,  that  the  falsity  of  the  repre- 
sentations inducing  the  subscription 
cannot  be  proved  as  against  the 
corporation  by  evidence  of  contra- 
dictory statements  made  by  an  of- 
ficer of  the  company  at  a  meeting  of 
the  stockholders,  such  statements 
being  made,  not  for  the  company, 
but  to  it. 

16.  First  National  Bank  v.  Hur- 
ford,  29  Iowa  579,  distinguished  in 
Davis  v.  Dumont,  37  Iowa  47,  54 ; 
Oil  City  Land  &  Imp.  Co.  v.  Porter, 
99  Ky.  254,  35  S.  W.  643,  18  Ky. 
Law  Rep.  151 ;  Heckscher  v.  Eden- 
born,  203  N.  Y.  210,  225-226,  96  N. 
E.  441. 

Duranty's  Case,  26  Beav.  268, 
271;  Gibson's  Case,  2.  DeGex.  &  J. 


REMEDIES  OF  STOCKHOLDERS.  443 

The  line  is,  in  practice,  somewhat  difficult  to  draw.  If  the  false 
representation  complained  of  is  contained  in  a  prospectus  issued 
by  the  promoters,  or  if  the  false  representation  was  made  by  the 
promoter  who  obtained  the  subscriber's  signature  and  subsequently 
turned  it  into  the  corporation,  the  right  of  rescission  on  the  part 
of  the  subscriber  is  clear.  If,  on  the  other  hand,  every  statement 
contained  in  the  prospectus,  and  every  representation  made  or  cir- 
culated by  the  promoters,  was  strictly  true,  it  is  clear  that  the 
subscription  cannot  be  rescinded  for  the  sole  reason  that  it  was 
partially  induced  by  the  misstatements  of  a  third  party  in  no  way 
connected  with  the  promotion  of  the  corporation  or  with  the  sale 
of  its  shares.  Difficulties  are,  however,  presented  by  the  border 
line  cases  which  arise  from  time  to  time. 

The  right  of  a  signer  of  the  memorandum  or  certificate  of  in- 
corporation to  rescind  because  of  the  false  representations  by 
which  his  signature  was  induced,  rests  upon  a  somewhat  different 
basis  from  the  right  of  a  mere  subscriber  for  shares.  It  is  held  in 
an  English  case  that  a  signer  of  the  memorandum  of  association 
cannot  in  such  case  be  relieved  from  his  obligations.17 

A  representation  of  the  promoters  must,  to  justify  the  rescis- 
sion of  a  subscription,  be  a  misreprensentation  of  a  fact  and  not  a 
mere  expression  of  opinion  or  promise  of  future  action.18 

275;  Pulsford  v.  Richards,  17  Beav.  Pressed    Brick   Co.,   212   Fed.    Rep. 

87 ;  see  Sleigh  v.  Glasgow  &  Trans-  878,  882,  129  C.  C.  A.  398. 

vaal    Options,    Ltd.,    Sess.    Cas.    6  Alabama. — Southern    States    Fire 

Fraser  420,  428,  and  see  Ex  parte  &  C.  Ins.  Co.  v.  DeLong,  178  Ala. 

Worth,  4  Drewry  529.  110,  59  So.  61;  Montgomery  So.  Ry. 

Nor    can    a    subscription    be    re-  Co.  v.  Matthews,  77  Ala.  357. 

scinded  because  of  loose  conversa-  Illinois. — Burwash  v.  Ballou,  132 

tions  not  intended  to  affect  the  sub-  111.    App.   71,   affirmed,   230   111.   34, 

scription.         New       Brunswick       &  82  N.  E.  355,  15  L.  R.  A.  N.  S.  409. 

Canada  Ry.,  etc.,  Co.  v.  Conybeare,  Indiana. — Fox  v.  Allensville,  etc., 

9  H.  L.  Cas.  711,  726.  Turnpike  Co.,  46  Ind.  31,  35-36. 

17.  See  Lord  Lurgan's  Case,  1902,  Iowa — Swan  v.  Mathre,  103  Iowa 
1  Ch.  Div.  707.  261,  72  N.  W.  522;   State  Bank  of 

18.  Federal. — In   re    National 


444 


THE  LAW  OF  PROMOTERS. 


The  remedy  of  rescission  is  from  its  nature  one  to  be  pursued 
primarily  against  the  opposite  party  to  the  contract.  The  action 
lies,  therefore,  against  the  corporation,  only  if  the  shares  in  ques- 
tion were  acquired  directly  from  it.19  This  has  been  held  to  be 
so  even  though  the  original  subscriber  was  a  mere  dummy  for  his 
subsequent  tranferee  who  seeks  to  rescind  the  subscription,  at 
least  in  the  absence  of  proof  that  the  corporation  knew  that  the 
nominal  subscriber  made  his  subscription  as  agent  for  the  trans- 
feree.20 


Indiana  v.  Gates,  114  Iowa  323,  86 
N.  W.  311. 

Kentucky. — Chicago  Bldg.  &  Mfg. 
Co.  v.  Beaven,  149  Ky.  267,  148  S. 
W.  37;  Southern  Ins.  Co.  v.  Milli- 
gan,  154  Ky.  216,  157  S.  W.  37. 

New  Hampshire. — Shattuck  v. 
Robbins,  68  N.  H.  565,  44  Atl.  694. 

New  fork. — Wilson  v.  Meyer,  154 
App.  Div.  300,  138  Supp.  1048. 

Pennsylvania. — Custar  v.  Titus- 
ville  Gas  &  Water  Co.,  63  Pa.  381. 

Utah. — Campbell  v.  Zion's  Co-op. 
Home  Bldg.,  etc.,  Co.,  —  Utah  — , 
148  Pac.  401. 

See  also  ante,  §  225. 

An  unperformed  promise  of  the 
promoters  to  procure,  for  the  sub- 
scriber, shares  in  another  corpora- 
tion, is  not  a  ground  for  the  rescis- 
sion of  his  subscription.  Grossman 
v.  Penrose  Ferry  Bridge  Co.,  26  Pa. 
69. 

A  statement  by  a  director  of  the 
corporation  that  the  proposed  enter- 
prise is  to  be  abandoned,  by  which 
statement  a  subscriber  is  induced 
to  subscribe  for  shares  in  a  rival 
company,  is  no  defense  to  an  action 
against  the  subscriber  upon  his 
original  subscription.  Buffalo  & 


New  York  City  R.  R.  Co.  v.  Dudley, 
14  N.  Y.  336. 

19.  Kelsey  v.  Northern  Light  Oil 
Co.,  45  N.  Y.  505 ;  Lewis  v.  Berry  ville 
Land   &    Improvement    Co.,    90   Va. 
693,    19     S.    E.     781;     McClanahan 
v.    Ivanhoe   Land   Co.,   96  Va.   124, 
30    S.    E.    450;    Dodgson's    Case,    3 
DeGex.  &  Sm.  85;  Ex  parte  Worth, 
4  Drew,  529;  Ex  parte  Bigge,  5  Jur. 
N.   S.  7;   Duranty's  Case,  26  Beav. 
268;  Blain  v.  Agar,  2  Sim.  289,  (see 
1  Sim.  37,  5  L.  J.  Ch.  1)  ;  Hyslop  v. 
Morel  Bros.,  etc.,  Ltd.,  1891,  Weekly 
Notes  19;   Kempson  v.  Saunders,  4 
Bing.  5,  12  Moore  44,  2  Car.  &  P. 
366. 

Cf.  Burnes  v.  Pennell,  2  H.  L. 
Cas.  497;  Peek  v.  Gurney,  L.  R.  13 
Eq.  79,  affirmed,  L.  R.  6  H.  L.  377. 

Subscription  moneys  paid  to  the 
promoters  and  not  turned  in  to  the 
corporation,  can  be  recovered  from 
the  promoters,  but  not  from  the 
corporation.  Commonwealth  Bond- 
ing &  Casualty  Ins.  Co.  v.  Cator,  — 
Tex.  Civ.  App.  — ,  175  S.  W.  1074. 
See  also  Commonwealth  Bonding  & 
Casualty  Ins.  Co.  v.  Thurman,  — 
Tex.  Civ.  App.  — ,  176  S.  W.  762. 

20.  Hyslop   v.    Morel  Bros.,   etc., 
Ltd.,  1891,  Weekly  Notes  19. 


REMEDIES  OF  STOCKHOLDERS. 


445 


A  stockholder  who,  because  of  not  having  procured  his  shares 
from  the  corporation,  cannot  maintain  his  action  for  rescission 
against  it,  must,  if  he  has  reason  to  wish  his  name  removed  from  the 
list  of  stockholders,  first  obtain  a  judgment  rescinding  the  pur- 
chase as  against  his  vendors,  and  then  compel  the  company  to 
strike  his  name  from  the  stock  ledger.21 

If  the  complainant  obtained  his  shares  directly  from  the  corpo- 
ration, his  demand  for  a  rescission  is  a  demand  against  the  cor- 
poration, and  not  against  the  promoters.  A  rescission  against 
the  promoters  can  be  had  only  if  the  shares  were  purchased  from 
them.22  The  promoters  by  whose  fraud  an  original  subscription 
for  shares  was  induced  may,  however,  be  joined  with  the  corpora- 
tion as  parties  defendant  in  an  action  for  the  rescission  thereof. 
While  the  rescission  of  the  subscription  is  a  demand  against  the 


21.  As    to    correcting    the    stock 
ledger,   see  Thompson   on   Corpora- 
tions,   (2nd   Ed.),    §    5681,   and   see 
Routh    v.    Webster,    10    Beav.    561, 
there  cited. 

22.  Cheney  v.  Dickinson,  172  Fed. 
Rep.  109,  111,  96  C.  C.  A.  314,  28 
L.    R.    A.    N.    S.   359;    Hindman   v. 
First  Nat'l  Bk.,  112  Fed.  Rep.  931, 
944,  50  C.   C.   A.   623,   57   L.   R.   A. 
108;  White  v.  Robinson,  145  N.  Y. 
App.     Div.     751,     130     Supp.     388; 
Franey  v.  Warner,  96  Wis.  222,  231, 
71  N.  W.  81,  86. 

It  was  held  in  Watson  v.  Earl 
of  Charlemont,  12  Ad.  &  El.  N.  S. 
856,  13  Jur.  117,  that  an  action  for 
money  had  and  received  will  not 
lie  against  those  promoters  who  did 
not  actually  receive  the  plaintiff's 
money. 

In  Nichols  v.  Buell,  157  Mich.  609, 


122  N.  W.  217,  the  subscriber  was 
allowed  to  bring  his  suit  for  rescis- 
sion against  the  promoters  as  the 
company  had  never  been  organized. 
See  post,  §  332. 

In  Heckscher  v.  Edenborn,  203  N. 
Y.  210,  96  N.  E.  441,  the  plaintiff 
was  allowed  to  recover  the  moneys 
paid  on  his  subscription  to  a  syndi- 
cate, in  an  action  against  the  syndi- 
cate manager  with  whom  the  sub- 
scription contract  had  been  made. 
See,  however,  Sim  v.  Edenborn,  163 
Fed.  Rep.  655,  and  Edenborn  v. 
Sim,  206  Fed.  Rep.  275,  124  C.  C. 
A.  339. 

In  Hill  v.  Lane,  L.  R.  11  Eq.  215, 
the  subscriber  was  allowed  to  re- 
cover from  the  promoters  individu- 
ally, the  moneys  paid  on  his  sub- 
scription. See  also  Harvey  v.  Col- 
lett,  15  Sim.  332,  15  L.  J.  Ch.  N.  S. 
376,  10  Jur.  603. 


446  THE  LAW  OF  PROMOTERS. 

corporation,  the  guilty  promoters  may  be  held  liable  with  it  for 
the  repayment  of  the  subscription  price.23 

A  rescission  of  the  subscription  may  be  had  regardless  of  any 
fraudulent  intent,24  but  the  promoters  cannot  be  held  personally 
liable  for  the  repayment  of  the  purchase  price,  unless  actual  fraud 
on  their  part  is  shown.25 

It  is  held  in  Ogilvie  v.  Currie  26  that  equity  will  not  give  judg- 
ment against  the  promoters  for  the  repayment  of  the  subscription 
price,  after  the  complainant's  right  to  rescind  as  against  the  cor- 
poration has  been  lost  by  delay. 

§  239.  Rescission  because  of  secret  profit  of  promoter. 

A  question  arises  whether  the  mere  failure  to  disclose  promotion 
profits  is  a  fraud  that  justifies  the  rescission  of  a  subscription 
made  in  ignorance  of  the  taking  of  such  profits.  Some  authorities 
seem  to  hold  that  the  taking  by  the  promoter  of  a  secret  profit, 
or  the  concealment  by  the  promoter  of  his  interest  in  a  trans- 
action with  the  corporation,  is  primarily  a  fraud  upon  the  corpo- 
ration, and  not  upon  the  subscribers,  and  does  not  constitute  a 
ground  for  the  rescission  of  their  subscriptions.27  A  secret  profit 

23.  New      Jersey. — Vreeland      v.  Capel  &  Co.  v.  Sim's  Ships  Composi- 

New  Jersey  Stone  Co.,  29  N.  J.  Eq.  tion  Co.,  57  L.  J.  Ch.  N.  S.  713. 

188,  195,  affirmed,  29  N.  J.  Eq.  651.  See  also  cases  cited,  post,  §  304 

New     York. — Lehman-Charley     v.  and  post,  §  243,  note  51. 

Bartlett,    135    App.    Div.    674,    678,  24.  See  ante,  §  209. 

684,  120  Supp.  501,  affirmed,  202  N.  25.  Mack  v.  Latta,  178  N.  Y.  525, 

Y.    524,    95    N.    E.    1125;    Mack    v.  532,  71  N.  E.  97,  67  L.  R.  A.  126; 

Latta,  178  N.  Y.  525,  71  N.  E.  97,  67  Ship  v.  Crosskill,  L.  R.  10  Eq.  73 ; 

L.  R.  A.  126,  and  authorities  cited.  Stewart  v.  Austin,  L.  R.  3  Eq.  299 ; 

Virginia. — Bosher  v.  Richmond  &  Henderson   v.    Lacon,   L.   R.   5   Eq. 

H.    Land   Co.,   89   Va.   455,   462,   16  249,  17  L.  T.  N.  S.  527. 

S.  E.  360,  362.  26.  37  L.  J.  Ch.  N.  S.  541. 

West   Virginia. — Cox   v.   National  The    promoters    would,    however, 

Coal  &  Oil  Investment  Co.,  61  W.  still    be   subject    to    an    action   for 

Va.  291,  313,  56  S.  E.  494,  503,  and  fraud  and  deceit.     See  post,  §  259. 

cases  cited.  27.  See  Averill  v.   Barber,  25  N. 

United  Kingdom  and   Colonies. —  Y.  St.  Rep.  194,  6  Supp.  255,  2  Silv. 


REMEDIES  OF  STOCKHOLDERS. 


447 


or  advantage  obtained  upon  the  promotion  constitutes,  it  is  true, 
primarily  a  fraud  upon  the  corporation,  and  such  profit  or  ad- 
vantage, if  taken  after  the  subscriptions  have  been  made,  can- 
not affect  the  rights  of  the  corporation  against  the  subscribers. 
That  an  active  misrepresentation  in  regard  to  the  promoter's  in- 
terest is  ground  for  the  rescission  of  a  subscription  induced  thereby 
is,  however,  well  settled.28  As  the  promoter  is  under  an  obligation 
to  disclose  to  the  subscribers  any  personal  advantage  which  he 
obtains  from  the  promotion,  the  concealment  thereof  constitutes  a 
fraud  upon  the  subscribers  and  sufficient  ground  for  the  rescis- 
sion of  any  subscriptions  made  in  ignorance  thereof.29  While  the 
taking  of  the  profit  is  a  fraud  upon  the  corporation,  the  obtaining 
of  a  subscription  by  its  concealment  is  a  fraud  upon  the  subscriber 
which  gives  rise  to  an  action,  either  for  damages  for  fraud  and 
deceit,  or  for  the  rescission  of  the  subscription.30 


40,  53  Hun  636;  Dorris  v.  French, 
4  Hun  (N.  Y.)  292. 

28.  Heckscher    v.    Edenborn,    203 
N.  Y.  210,  96  N.  E.'441,  reversing, 
137  N.  Y.  App.  Dlv.  899,  122  Supp. 
1131,  which  followed  131  N.  Y.  App. 
Div.  253,  267,  115  Supp.  673;  Hall 
v.   Grayson  County  Nat'l  Bank,  36 
Tex.  Civ.  App.  317,  81  S.  W.  762; 
West  End  Real  Estate  Co.  v.  Nash, 
51  W.  Va.  341,  41  S.  E.  182;  Kent 
v.    Freehold    Land    &    Brickmaking 
Co.,  L.  R.  4  Eq.  588, 17  L.  T.  N.  S.  77, 

(reversed  on  another  ground,  L.  R. 
3  Ch.  App.  493),  following  Directors, 
etc.,  of  Central  Ry.  Co.  of  Venezuela 
v.  Kisch,  L.  R.  2  H.  L.  99,  16  L.  T. 
N.  S.  500;  Capel  &  Co.  v.  Sim's 
Ships  Composition  Co.,  57  L.  J.  Ch. 
N.  S.  713. 

See  ante,  §  215. 

29.  Federal. — Maine     Northwest- 
ern Dev.  Co.  v.  Northern  Commer- 
cial Co.,  213  Fed.  Rep.  103. 


loica. — Hinkley  v.  Sac  Oil  &  Pipe 
Line  Co.,  132  Iowa  396,  107  N.  W. 
629,  119  Am.  St.  Rep.  564. 

Virginia. — Virginia  Land  Co.  v. 
Haupt,  90  Va.  533,  536-537,  19  S. 
E.  168,  169,  44  Am.  St.  R.  939. 

West  Virginia. — West  End  Real 
Estate  Co.  v.  Nash,  51  W.  Va.  341, 
41  S.  E.  182. 

United  Kingdom  and  Colonies. — 
Components  Tube  Co.  v.  Naylor, 
1900,  2  Ir.  R.  1. 

But  see  Heckscher  v.  Edenborn, 
203  N.  Y.  210,  224-225,  96  N.  E.  441, 
where  the  fact  that  the  subscriber 
sought  permission  to  subscribe, 
without  solicitation  by  the  defend- 
ant, was  held  to  relieve  the  defend- 
ant from  the  burden  of  disclosing 
his  personal  interest  in  the  trans- 
action. 

30.  See  cases  cited  in  preceding 
note.  As.  to  the  action  for  damages, 
see  ante,  §§  232-233. 


448  THE  LAW  OF  PROMOTERS. 

§  240.  Restoration  of  status  quo  as  condition  of  rescission. 

A  stockholder,  though  induced  by  fraud  to  take  the  shares  of 
the  corporation,  cannot  rescind  his  purchase  or  subscription  with- 
out restoring  the  former  status.31 

In  Franey  v.  Warner,32  the  complainant  had  been  induced  by 
the  false  representations  of  the  promoters  and  by  the  concealment 
of  their  secret  profits,  to  join  with  them  in  the  purchase  of  certain 
real  estate  afterwards  conveyed  to  the  corporation  in  payment  for 
its  shares.  The  court  held  that  a  transfer  of  the  complainant's 
shares  would  not  amount  to  a  reconveyance  of  the  promoters' 
former  interest  in  the  real  estate,  and  that  the  complainant  was 
not  in  a  position  to  rescind.  This  decision  seems  too  technical. 
The  interest  in  the  realty  conveyed  to  the  complainant  was,  if  the 
situation  were  otherwise  unchanged,  substantially  represented  by 
the  shares,  and  a  transfer  thereof  amounted  in  practical  effect  to 
a  reconveyance  of  the  real  estate.33 

A  tender  of  the  plaintiff's  shares  was,  in  a  recent  New  York  case, 
held  a  sufficient  offer  to  restore,  although  the  property  purchased 
from  the  defendant  promoter  was  only  one  of  a  number  of  proper- 
ties that  went  into  the  corporation,  and  the  shares  of  the  company 
were  by  no  means  the  equivalent  of  the  former  property  of  the 
promoter.34  The  United  States  Circuit  Court  of  Appeals  consid- 
ering the  same  facts  came,  however,  to  a  different  conclusion.35 

31.  Getty  v.  Devlin,  54  N.  Y.  403,  33.  See   Heckscher   v.    Edenbornr 
414 ;  Franey  v.  Warner,  96  Wis.  222,  203    N.    Y.    210,    227-230,   96   N.    E. 
71  'N.  W.  81 ;  Western  Bank  of  Scot-  441 ;  Barbour  v.  Hurlburt,  137  Mich, 
land  v.  Addie,  L.  R.  1   Sc.  &  Div.  534,  539,  100  N.  W.  781,  783;  Short 
App.   Cas.   145,   164-165;   Clarke  v.  v.    Stevenson,   63   Pa.    St.    95.     Cf. 
Dickson,  1  El.  Bl.  &  El.  148.  ante,  §  170,  note. 

32.  96  Wis.  222,  234,  71  N.  W.  81,  34.  Heckscher    v.    Edenborn,   203 
85,  relying  to  some  extent  on  Getty  N.   Y.  210,  230,  96  N.   E.  441.     Cf. 
v.   Devlin,  54  N.   Y.  403,  70  N.   Y.  ante,  §  170,  note. 

504.    See  Western  Bank  of  Scotland  35.  Edenborn    v.    Sim,    206    Fed. 

v.   Addie,  L.  R.  1  Sc.   &  Div.  App.  Rep.  275,  124  C.  C.  A.  339.    Cf.  ante, 

Cas.  145,  165-166.     Cf.  ante,  §  170,  §  170,  note, 
note. 


REMEDIES  OF  STOCKHOLDERS.  449 

In  Ginn  v.  Almy,36  the  plaintiff  had,  by  the  false  representations 
of  the  defendant,  been  induced  to  purchase  the  shares  of  two  min- 
ing companies.  These  companies  were  subsequently  consolidated 
with  the  consent  of  the  stockholders  including  the  defendant. 
It  was  held  that  a  tender  by  the  plaintiff  of  his  shares  in  the  con- 
solidated company,  amounted  to  an  offer  to  restore  to  the  defend- 
ant what  had  originally  been  received,  and  placed  the  plaintiff  in  a 
position  to  recover  the  purchase  price  of  the  original  shares. 

The  rule  making  an  offer  to  restore  a  condition  of  the  rescission, 
is  one  of  substance  and  not  of  form,  and  such  an  offer  is  unneces- 
sary if  there  is  in  fact  nothing  substantial  to  restore.37  In  Zang 
v.  Adams,38  the  note  in  suit,  given  by  the  defendant  in  payment  for 
his  shares,  had,  before  the  discovery  of  the  fraud,  been  pledged  by 
the  corporation  as  collateral  security  to  its  bank.  The  corpo- 
ration no  longer  owned  any  property,  and  the  shares  were  worth- 
less. The  court  held  that  the  defendant  might  under  these  cir- 
cumstances, plead  fraud  as  a  defense  to  an  action  on  his  note,, 
though  he  had  not  tendered  the  shares  to  the  corporation  nor  de- 
manded of  it  a  surrender  of  the  note. 

A  subscriber  may  also  rescind  without  returning  his  shares  if 
the  return  of  such  shares  has  been  made  impossible  by  the  act  of 
the  defendant.39 

§  241.  Methods  of  effectuating  rescission. 

The  remedy  of  rescission  may  be  pursued  in  a  number  of  differ- 
ent ways.  If  the  purchase  price  of  the  shares,  or  a  part  thereof, 
has  already  been  paid,  the  subscriber  or  purchaser  may  give  notice 
of  disaffirmance,  offer  to  return  his  shares,  and  maintain  an  action 

36.  212  Mass.  486,  507,  99  N.  E.          38.  23  Colo.  408,  48  Pac.  509,  58 
276.    Cf.  ante,  §  170,  note.  Am.   St.   R.   249. 

37.  Burns  v.  McCabe,  72  Pa.  309.          39.  Findlay  v.  Baltimore  Trust  & 
It  Is  held  in  State   Bank  of  In-      Guarantee  Co.,  97  Md.  716,  55  Atl. 

diana  v.  Cook,    (125  Iowa  111,  100  379.     Where  the  plaintiff  had  sold 

N.  W.  72),  that  if  the  shares  are  his  securities  on  the  advice  of  the 

valueless,  it  is  not  necessary  to  re-  defendant, 
turn  them.  See  ante,  §  170. 


450 


THE  LAW  OF  PROMOTERS. 


at  law  for  money  had  and  received,  for  the  recovery  of  the  moneys 
paid;  or  he  may,  without  a  prior  offer  to  restore  the  shares, 
bring  an  action  in  equity  for  the  rescission  of  his  subscription  or 
purchase,  offering  in  his  complaint  to  return  the  shares.40 

If  the  subscriber  learns  of  the  promoter's  fraud  before  the  sub- 
scription price  has  been  paid,  he  may  give  notice  of  disaffirmance, 
and  after  offering  to  surrender  his  shares,  defend,  upon  the  ground 
of  fraud,  any  action  brought  against  him  upon  his  subscription,41 
or  he  may  sue  in  equity  to  enjoin  action  upon  his  subscription  and 


40.  Cheney  v.  Dickinson,  172  Fed. 
Rep.  109,  96  C.  C.  A.  314,  28  L.  R. 
A.  N.  S.  359 ;  Hindman  v.  First  Nat'l 
Bk.,   112  Fed.   Rep  931,  944,  50  C. 
C.  A.  623,  57  L.  R.  A.  108;  Vail  v. 
Reynolds,    118   N.    Y.   297,    302-303, 
23  N.  E.  301;   Heckscher  v.  Eden- 
born,  203  N.   Y.   210,  220,  96  N.   E. 
441;  Getty  v.  Devlin,  54  N.  Y.  403, 
414-415 ;  Clarke  v.  Mercantile  Trust 
Co.,  110  N.  Y.   App.   Div.  901,  902, 
95  Supp.  1118,   (dissenting  opinion), 
and    cases    cited ;    Bosley    v.    Nat'l 
Mach.  Co.,  123  N.  Y.  550,  25  N.  E. 
990;  Thompson  v.  Hardy,  19  S.  D. 
91,  102  N.  W.  299,  and  cases  cited: 
Jordan   v.   Annex   Corporation,   109 
Va.   625,  64   S.   E.   1050,  17  Am.   & 
Eng.     Ann.     Gas.     267;     Wilson    v. 
Hundley,  96  Va.  96,  30  S.  E.  492,  70 
Am.  St.  Rep.  837. 

See  note  to  Fear  v.  Bartlett,  31 
L.  R.  A.  721. 

41.  Texas.— H  a  1 1      v.      Grayson 
County  Nat'l  Bk.,  36  Tex.  Civ.  App. 
317,  81  S.  W.  762. 

Virginia. — Virginia  Land  Co.  v. 
Haupt,  90  Va.  533,  19  S.  E.  168,  44 
Am.  St.  Rep.  939;  Jordan  v.  Annex 
Corporation,  109  Va.  625,  630,  64  S. 
E.  1050,  1052,  17  Am.  &  Eng.  Ann. 


Cas.  267;  Wilson  v.  Hundley,  96 
Va.  96,  30  S.  E.  492,  70  Am.  St.  Rep. 
837;  West  End  Real  Estate  Co.  v. 
Claiborne,  97  Va.  734,  34  S.  E.  900. 

Washington. — Johns  v.  Coffee,  74 
Wash.  189,  133  Pac.  4,  affirmed  on 
reargument,  77  Wash.  700,  137  Pac. 
808. 

West  Virginia. — West  End  Real 
Estate  Co.  v.  Nash,  51  W.  Va.  341, 
41  S.  E.  182. 

United  Kingdom  and  Colonies. — 
Oakes  v.  Turquand,  L.  R.  2  H.  L. 
325,  344 ;  New  Brunswick  &  Canada 
Ry.,  etc.,  Co.  v.  Muggeridge,  1 
Drewry  &  Smale  363,  383 ;  Bwlch-Y- 
Plwm  Lead  Mining  Co.  v.  Baynes, 
L.  R.  2  Exch.  324;  Aaron's  Reefs  v. 
Twiss,  1896,  App.  Cas.  273. 

See  note  to  Fear  v.  Bartlett,  33 
L.  R.  A.  721,  and  see  Vreeland  v. 
New  Jersey  Stone  Co.,  29  N.  J.  Eq. 
188,  189,  note. 

Fraud  may  likewise  be  pleaded  as 
a  defense  to  an  action  upon  a  note 
given  in  payment  of  the  subscrip- 
tion price  of  the  shares.  Alabama 
Foundry  &  Mach.  Works  v.  Dallas, 
127  Ala.  513,  29  So.  459;  Zang  v. 
Adams,  23  Colo.  408,  48  Pac.  509, 
58  Am.  St.  Rep.  249;  People's  NatL 


REMEDIES  OF  STOCKHOLDERS.  451 

for  the  cancellation  thereof  and  the  surrender  of  any  note  or  other 
obligation  given  in  payment  therefor.42 

A  subscriber  who  has  borrowed  the  money  to  pay  for  his  shares, 
from  the  persons  by  whose  fraud  his  subscription  was  induced, 
may  plead  such  fraud  as  a  defense  to  an  action  for  the  recovery  of 
the  money  loaned  to  him.43 

§  242.  Joinder  of  actions. 

A  subscriber  cannot  join  a  demand  for  the  rescission  of  his  sub- 
scription with  a  demand  for  the  enforcement  of  a  right  claimed 
thereunder.44  A  demand  for  individual  relief  cannot  be  joined 
with  a  demand  on  behalf  of  the  corporation.45 

§  243.  Joinder  of  parties. 

If  the  circumstances  are  such  as  to  justify  an  action  for  an 
accounting  to  the  individual  subscribers  for  the  secret  profits  of 
the  promoters,  all  the  subscribers  may  unite  as  plaintiffs  in  a 
single  action.46 

A  number  of  subscribers  whose  subscriptions  were  induced  by 

Bank   v.   Taylor,   —   Ariz.   — ,   149  held  not  to  be  an  innocent  purchaser 

Pac.  763.  in  State  Bank  of  Indiana  v.  Ment- 

As  to  pleading  fraud  as  a  defense  zer,  125  Iowa  101, 100  N.  W.  69. 

to  an  action  under  the  Statute  of  7  42.  Manning  v.  Berdan,  135  Fed. 

and  8  Victoria,  (Ch.  110,  §  55),  see  Rep.  159.     See  Luetzke  v.  Roberts, 

Aaron's  Reefs  v.  Twiss,  1896,  App.  130  Wis.  97,  109  N.  W.  949. 

Cas.  273,  277-278;  Deposit  Life  As-  43.  National     Exchange     Co.     v. 

surance  Co.  v.  Ayscough,  6  E.  &  B.  Drew,  32  Eng.  Law  &  Eq.  1. 

761.  44.  See  Petrie  v.  Guelph  Lumber 

A  subscriber  pleading  fraud  as  a  Co.,  11  Can.   S.   C.  450,   15  Am.  & 

defense  to  an  action  upon  a  sub-  Eng.  Corp.  Cas.  487,  and  see  ante,  § 

scription  must,  in  his  answer,  show  195. 

that    he    rescinded    promptly    upon  45.  See  ante,  §  195. 

discovering  the  fraud.     See  Ameri-  46.  Getty  v.  Devlin,  54  N.  Y.  403, 

can  Bldg.  &  Loan  Ass'n  v.  Rainbolt,  415;   same  v.   same,  70  N.   Y.  504, 

48  Neb.  434,  67  N.  W.  493.    See  also  511 ;  Dole  v.  Wooldredge,  135  Mass. 

Deposit  Life  Ass.  Co.  v.  Ayscough,  140,  and  see  cases  cited  under  notes 

6  E.  &  B.  761,  764.  to    §    237,    ante.     Cf.   Tompkins    v. 

A   bank   discounting   subscription  Sperry,   Jones   &  Co.,   96   Md.   560, 

notes   was,   under  the  facts  found,  583,  54  Atl.  254,  258-259. 


452 


THE  LAW  OF  PROMOTERS. 


false  representations  contained  in  the  same  prospectus,  may  join 
as  plaintiffs  in  an  action  for  the  rescission  of  their  several  sub- 
scriptions,47 but  they  cannot  bring  their  suit  on  behalf  of  them- 
selves and  all  other  subscribers  similarly  situated.48  In  Hamilton 
v.  American  Hulled  Bean  Co.,49  parties  who  had  been  induced  to 
subscribe  for  their  shares  by  means  of  identical  false  represen- 
tations made  at  different  times,  were  permitted  to  join  as  plaintiffs 
in  an  action  for  the  rescission  thereof. 

Parties  deceived  by  the  same  or  similar  misrepresentations  can- 
not join  as  plaintiffs  in  an  action  at  law  to  recover  damages  for 
fraud  and  deceit.50 


47.  Sherman  v.  American  Stove 
Co.,  85  Mich.  169,  48  N.  W.  537. 

Mack  v.  Latta,  178  N.  Y.  525,  (at 
pages  531  and  534),  71  N.  E.  97, 
67  L.  R.  A.  126. 

Bosher  v.  Richmond  &  H.  Land 
Co.,  89  Va.  455,  16  S.  E.  360.  (Ap- 
proved in  Brown  v.  Bedford  City 
Land  and  Improvement  Co.,  91  Va. 
31,  20  S.  E.  968,  followed  in  Rader 
v.  Bristol  Land  Co.,  94  Va.  766,  27 
S.  E.  590)  ;  Carey  v.  Coffee  Stem- 
ming Machine  Co.,  20  S.  E.  778. 

Beeching  v.  Lloyd,  3  Drewry  227; 
Arnison  v.  Smith,  L.  R.  41  Ch.  Div. 
348;  Macbride  v.  Lindsay,  9  Hare 
574;  Cridland  v.  DeMauley,  1  DeG. 
&  Sm.  459. 

In  Lungren  v.  Pennell,  10  Weekly 
Notes  Cas.  297,  13  Cent.  L.  J.  211, 
a  joinder  was  held  improper,  the 
representations  to  the  various  plain- 
tiffs having  been  made  by  various 
defendants. 

Creditors  of  the  corporation  can- 
not be  joined  as  plaintiffs  with 
stockholders  demanding  a  rescission 
of  their  subscriptions,  as  their  in- 
terests are  antagonistic.  Brown  v. 


Bedford  City  Land  &  Imp.  Co.,  91 
Va.  31,  20  S.  E.  968. 

48.  Mack  v.  Latta,  178  N.  Y.  525, 
531,  71  N.   E.   97,  67  L.  R.  A.  126, 
quoting  from  Cook  on  Corporations, 
§  156;  Croskey  v.  Bank  of  Wales, 
4  Giff.   314;   Hallows  v.   Fernie,  L. 
R.  3  Ch.  App.  467,  471. 

Cf.  Bosher  v.  Richmond  &  H. 
Land  Co.,  89  Va.  455,  16  S.  E.  360; 
Brown  v.  Bedford  City  Land  &  Imp. 
Co.,  91  Va.  31,  20  S.  E.  968. 

49.  143  Mich.  277,  106  N.  W.  731, 
156  Mich.  609,  121  N.  W.  731. 

50.  Dole  v.  Wooldredge,  135  Mass, 
140.     But  see  Drincqbier  v.   Wood, 
1899,   1  Ch.   Div.  393. 

Where  the  representations  com- 
plained of  are  made  orally,  evi- 
dence of  similar  misrepresentations 
to  other  subscribers  is  said  to  be 
competent  on  the  question  of  fraud- 
ulent intent.  Miller  v.  Barber,  66 
N.  Y.  558,  568;  McAleer  v.  Horsey, 
35  Md.  439,  461. 

In  Lebanon  Steam  Laundry  v. 
Dyckman,  22  Ky.  L.  R.  348,  57  S. 
W.  227,  the  individual  defendants 
set  up  a  counter-claim  for  damages 


REMEDIES  OF  STOCKHOLDERS. 


453 


A  stockholder  wishing  to  rescind  his  subscription  because  of  the 
fraudulent  representations  by  which  it  was  induced,  may  join  the 
corporation  and  the  fraudulent  promoters  as  defendants  in  an 
action  in  equity,  demanding  a  rescission  of  the  subscription  as 
against  the  corporation,  and  a  judgment  against  the  corporation 
and  the  guilty  promoters  for  the  repayment  of  the  moneys  paid 
thereon.51 

Separate  causes  of  action  against  a  number  of  promoters  can- 
not be  joined  in  one  action  unless  each  of  the  defendant  promoters 
is  alleged  to  be  liable  upon  every  cause  of  action.52 


for  fraud  and  deceit.  It  was 
claimed  that  the  plaintiff  had  by 
false  representations  induced  the 
defendant  Newcome  to  purchase  the 
plant  at  an  excessive  valuation  and 
had  subsequently  by  similar  repre- 
sentations induced  the  defendant 
Edmonds  to  purchase  from  the  de- 
fendant Newcome  an  interest  there- 
in. The  court  held  that  the  counter- 
claim was  properly  stricken  out,  as 
the  representations  to  Newcome  did 
not  damage  Edmonds,  and  the  rep- 
resentations to  Edmonds,  if  they 
damaged  him,  must  have  benefited 
Newcome. 

51.  Federal. — Tyler  v.  Savage, 
143  U.  S.  79,  36  L.  Ed.  82,  12  S.  C. 
340. 

Michigan. — Sherman  v.  American 
Stove  Co.,  85  Mich.  169,  48  N.  W. 
537;  Hamilton  v.  American  Hulled 
Bean  Co.,  156  Mich.  609,  121  N.  W. 
731 ;  same  case  on  demurrer,  143 
Mich.  277,  106  N.  W.  731. 

New  Jersey. — Vreeland  v.  New 
Jersey  Stone  Co.,  29  N.  J.  Eq.  188, 
affirmed,  29  N.  J.  Eq.  651. 

New  York.— Mack  v.  Latta,  178 
N.  Y.  525,  71  N.  E.  97,  67  L.  R.  A. 


126,  and  authorities  cited ;  Lehman- 
Charley  v.  Bartlett,  135  App.  Div. 
674,  120  Supp.  501,  affirmed,  202  N. 
Y.  524,  95  N.  E.  1125. 

Virginia. — Bosher  v.  Richmond  & 
H.  Land  Co.,  89  Va.  455,  462,  16  S. 
E.  360,  362;  Carey  v.  Coffee  Stem- 
ming Machine  Co.,  20  S.  E.  778. 

West  Virginia. — Cox  v.  National 
Coal  &  Oil  Investment  Co.,  61  W. 
Va.  291,  313,  56  S.  E.  494,  503. 

United  Kingdom  and  Colonies. — 
Capel  &  Co.  v.  Sim's  Ship  Composi- 
tion Co.,  57  L.  J.  Ch.  N.  S'.  713,  717- 
718,  58  L.  T.  N.  S.  807,  36  W.  R.  689. 

As  to  joining  an  action  against 
the  corporation,  for  a  rescission, 
with  an  action  against  the  pro- 
moters, for  fraud  and  deceit,  see 
Clarke  v.  Mercantile  Trust  Co.,  110 
N.  Y.  App.  Div.  901,  95  Supp.  1118, 
(dissenting  opinion),  Frankenburg 
v.  Great  Horseless  Carriage  Co., 
1900,  1  Q.  B.  Div.  504. 

52.  Gower  v.  Couldridge,  1898, 
1  Q.  B.  Div.  348,  explained  In 
Frankenburg  v.  Great  Horseless 
Carriage  Co.,  1900,  1  Q.  B.  Div. 
504,  509,  and  see  note  47,  supra. 

See  ante,  §  195. 


CHAPTER  XIII. 

Or  DEFENSES  TO  SUITS  BY  INDIVIDUAL,  STOCKHOLDERS. 

Section  244.  Introductory. 

245.  Defense  that  no  benefit  accrued  to  promoter. 

246.  Defense  that  promoter  urged  cancellation  of  subscriptions. 

247.  Absence  of  fraudulent  intent. 

248.  Enterprise  doomed  to  failure  in  any  event. 

249.  Prior  recovery  by  corporation. 

250.  Defense    that    property    in    relation    to    which    representa- 
tions  made,   not   sold   to   corporation   at   time   of  plaintiff's 
subscription. 

251.  Defense  that  plaintiff  has  disposed  of  his  shares. 

252.  Defense  of  election  to  disaffirm. 

253.  Defense  that  plaintiff  might  readily  have  ascertained  truth. 

254.  Defense    that   representations    concerning   credit    of    another 
are  not  actionable  unless  in  writing. 

255.  Defense  of  statute  of  limitations. 

256.  Defenses  to  suits  for  accounting. 

257.  Defenses  to  actions  for  rescission: — Election  to  affirm. 

258.  Acts  constituting  election. 

259.  Effect  of  election  to  affirm. 

260.  Defense  of  laches. 

261.  Delay  as  defense  to  action  upon  a  rescission. 

262.  Rescission  after  insolvency  of  corporation. 

263.  Defense  that  oral  representations  were  merged  in  subscrip- 
tion agreement. 

§  244.  Introductory. 

Questions  relating  to  the  defenses  interposed  by  promoters  to 
suits  brought  against  them  by,  or  on  behalf  of,  the  corporation 
have  been  considered  in  an  earlier  chapter.  It  is  proposed  in  this 
chapter  to  discuss  briefly  some  defenses  which  have,  from  time  to 

(454) 


DEFENSES.  455 

time,  been  interposed  in  suits  brought  against  the  promoters  by 
subscribers  for  the  company's  shares. 

i 
§  245.  Defense  that  no  benefit  accrued  to  promoter. 

An  action  for  damages  for  fraud  and  deceit  is  based  upon  the 
injury  done  to  the  plaintiff,  not  upon  the  benefits  received  by  the 
defendants.  It  is,  therefore,  immaterial  that  the  promoters 
charged  with  inducing  a  purchase  of  shares  by  fraudulent  repre- 
sentations were  not  themselves  the  owners  of  the  shares  sold, 
had  no  interest  therein,  and  derived  no  benefit  from  the  trans- 
action.1 

If  the  subscriber  complains  that  shares  were  secretly  and  im- 
properly appropriated  to  themselves  by  the  promoters,  it  is  no 
defense  that  such  shares  never  had  any  value  or  ultimately  be- 
came valueless,  and  that  the  promoters  derived  no  profit,  but,  on 
the  contrary,  suffered  loss  from  the  transaction.2 

§  246.  Defense  that  promoter  urged  cancellation  of  subscrip- 
tions. 
It  has  been  held  that  a  promoter  sued  by  the  subscribers  for 

1.  Cheney  v.  Dickinson,  172  Fed.  578;  Fenn  v.  Curtis,  23  Hun  (N.  Y.) 

Rep.  109,  96  C.  C.  A.  314,  28  L.  R.  384 ;  Cox  v.  National  Coal  &  Oil  In- 

A.  N.  S.  359 ;  Hindman  v.  First  Natl.  vestment  Co.,  61  W.   Va.  291,  312- 

Bk.,  112  Fed.  Rep.  931,  945,  50  C.  313,   56   S.   E.   494,   503,   and   cases 

C.  A.  623,  57  L.  R.  A.  108 ;  Hlnkley  cited ;  but  see  Schanck  v.  Morris,  30 

v.  Sac  Oil  &  Pipe  Line  Co.,  132  Iowa  N.  Y.  Super.  658. 

396,  406,   107   N.    W.   629,   633,   119  Note  to  Cottrill  v.  Krum,  18  Am. 

Am.  St.  R.  564;  Mack  v.  Latta,  178  St.   Rep.   549,  555,   14   Am.   &  Eng. 

N.  Y.  525,  529,  71  N.  E.  97,  67  L.  R.  Ency.  (2nd.  Ed.)  153,  and  see  ante, 

A.  126,  and  cases  cited;  Clarke  v.  §  175. 

Mercantile  Trust  Co.,  110  N.  Y.  App.  2.  Hinkley  v.  Sac  Oil  &  Pipe  Line 

Div.  901,  904,  95   Supp.  1118,    (dls-  Co.,    132    Iowa    396,    406,    107    N. 

senting  opinion)  ;  Greene  v.  Mercan-  W.   629,   632,   119   Am.    St.   R.   564. 

tile  Trust  Co.,  60  N.  Y.  Misc.  189,  See  also  Torrey  v.  Toledo  Portland 

111   Supp.  802,  affirmed,  128  N.  Y.  Cement  Co.,  158  Mich.  348,  122  N. 

App.    Div.    914,    112    Supp.    1131;  W.  614. 

Cazeaux  v.  Mali,  25  Barb.   (N.  Y.)  See  ante,  §§  133,  165. 


456  THE  LAW  OF  PROMOTERS. 

damages  for  fraud  and  deceit,  cannot  avoid  liability  by  showing 
that  he,  at  a  time  when  the  capital  of  the  corporation  was  still 
intact,  urged  upon  the  directors  the  return  to  the  shareholders  of 
the  amount  of  their  subscriptions,  for,  it  is  said,  a  tort  feasor 
cannot  absolve  himself  from  liability  by  showing  that  the  conse- 
quences of  his  unlawful  acts  might  have  been  avoided  by  persons 
over  whom  the  plaintiff  had  no  control.3 

§  247.  Absence  of  fraudulent  intent. 

An  honest  belief  on  the  part  of  the  promoter  in  the  truth  of 
the  representations  made  by  him  is,  if  such  representations  were 
in  fact  false,  no  defense  to  an  action  for  the  rescission  of  the  sub- 
scription or  purchase  induced  thereby.  The  vendor  of  the  shares, 
whether  the  corporation  or  the  promoter  himself,  cannot  excuse  the 
making  of  the  false  representations  by  showing  that  the  repre- 
sentations were,  when  made,  believed  to  be  true,  and  at  the  same 
time  obtain  the  full  benefit  of  the  misrepresentations  by  holding 
the  party  deceived  to  the  performance  of  the  purchase  induced 
thereby.4  . 

The  sufficiency,  as  a  defense  to  an  action  for  fraud  and  deceit, 
of  a  bona  fide  belief  in  the  truth  of  one's  representations,  presents 
a  question  of  some  difficulty  which  is  considered  at  length  in  an 
earlier  chapter.5 

§  248.  Enterprise  doomed  to  failure  in  any  event. 

If  the  purchase  of  the  plaintiff's  shares  was  induced  by  a  mis- 
representation of  a  material  fact,  it  is  no  defense  to  his  suit  that 
the  company  subsequently  collapsed  by  reason  of  facts  in  no  way 
related  to  the  representation  of  which  he  complains.  Though  the 
event  proved  that  the  company  would  have  been  doomed  to  failure 
even  had  everything  been  in  fact  just  as  represented  to  the  plain- 
tiff, it  does  not  follow  that  the  matters  misrepresented  were  imma- 

3.  Twycross  v.  Grant,  L.  R.  2  C.        -4.  See  ante,  §  209. 
P.  D.  469,  490.  5.  See  ante,  §§  207-208. 


DEFENSES.  457 

terial,  nor  that  the  plaintiff  was  not  damaged  by  the  misrepresen- 
tation. The  basis  of  his  complaint  is  that  he  was  induced  by  a  mis- 
representation to  purchase  the  shares  and  that  loss  resulted  from 
his  purchase;  that  had  the  actual  facts  been  presented  to  him  he 
would  not  have  purchased  the  shares,  and  that  whatever  loss  he 
suffered  by  reason  of  his  investment  was  caused  by  the  misrepre- 
sentation which  induced  him  to  make  the  purchase.8 

§  249.  Prior  recovery  by  corporation. 

Complaint  is  frequently  made  by  subscribers  that  their  sub- 
scriptions were  induced  by  the  promoter's  concealment  of,  or  false 
representations  in  relation  to,  some  secret  advantage  taken  of  the 
corporation.  It  is  clear  on  principle  that  the  circumstance  that 
the  corporation  had  upon  learning  the  facts  brought  suit  and 
recovered  judgment  against  the  promoter  because  of  the  secret 
advantage  taken  of  it,  does  not  affect  the  right  of  a  subscriber  to 
recover  his  personal  damages  from  the  promoter,  except  in  so  far  as 
a  recovery  by  the  corporation  increases  the  value  of  his  shares  and 
thereby  reduces  his  damages.  A  recovery  by  the  corporation 
would  not  affect  the  amount  of  the  subscriber's  damages  if  he  had, 
before  the  corporation  recovered  its  judgment,  parted  with  his 
shares.7 

.§  250.  Defense  that  property  in  relation  to  which  representa- 
tions were  made,  had  not  been  sold  to  the  corporation 
at  time  of  plaintiff's  subscription. 
A  question  has  been  raised  whether  an  action  for  fraud  and  de- 

6.  Peek  v.  Derry,  L.  R.  37  Ch.  Div.  be  taken  In  some  jurisdictions.    See 

541,  577,  reversed  on  another  point,  post,     §    277,    and    see    Doran     v. 

sub  nom.  Derry  v.  Peek,  L.  R.  14  Eaton,  40  Minn.  35,  41  N.  W.  244, 

App.    Cas.    337.      See    Twycross    v.  but   compare   the   other    Minnesota 

Grant,  L.  R.  2  C.  P.  D.  469,  504 ;  cf .  cases  cited  under  §  277,  post. 

McConnell   v.   Wright,   1903,   1   Ch.  7.  Alexandra    Oil   &   Dev.   Co.   v. 

Div.  546.  Cook,  10  Ont.  W.  R.   781,  785,  af- 

A   different   view    might   perhaps  firmed,  11  Ont.  W.  R.  1054. 


458  THE  LAW  OF  PROMOTERS. 

ceit  will  lie  at  the  hands  of  a  subscriber  who  made  his  subscription 
before  the  property  to  which  the  false  representations  related  had 
been  acquired  by  the  company.8  The  argument  made  is  that  no 
injury  was  done  to  the  plaintiff  at  the  time  of  his  subscription,  and 
that  the  injury  at  the  time  of  the  subsequent  sale  was  an  injury 
to  the  corporation  and  not  to  the  existing  subscribers.  It  seems 
clear  on  principle  that  if  a  person  is  induced  to  subscribe  for 
shares  of  a  corporation  by  fraudulent  representations  in  regard 
to  property  to  be  acquired  by  it,  his  subscription,  is  induced  by 
the  false  representation  of  an  existing  fact,  and  he  has  an  action 
for  damages  against  the  guilty  parties.  This  would  be  so  though 
the  directors  on  discovering  the  truth  refused  to  complete  the  pur- 
chase.9 

It  has  been  held  that  if  the  plaintiff  was  induced  to  subscribe 
for  shares  by  the  fraudulent  representations  of  the  promoters  and 
by  the  concealment  of  the  fact  that  the  promoters  were  themselves 
the  owners  and  vendors  of  the  property  which  the  corporation  was 
organized  to  purchase,  the  plaintiff  has  an  action  for  fraud  and 
deceit,  and  the  fact  that  the  scheme  of  selling  the  promoters'  prop- 
erty to  the  corporation  was  ultimately  abandoned  is  no  defense, 
for  the  gist  of  the  action  is  that  the  plaintiff  was  induced  by  fraud 
to  subscribe  and  pay  for  his  shares.10 

§  251.  Defense  that  plaintiff  has  disposed  of  his  shares. 

It  is  obviously  no  defense  to  an  action  for  damages  for  fraud  and 
deceit  that  the  plaintiff  had  sold  his  shares  before  the  commence- 
ment of  his  action.  The  injury  was  done  and  the  cause  of  action 
accrued  when  the  shares  were  subscribed  for,  and  the  right  of 
action  remains  with  the  subscriber,  and  is  not  affected  by  the 
transfer  of  his  shares.11 

8.  Dunnett    v.    Mitchell,    Session  10.  Paddock   v.    Fletcher,   42  Vt. 
Cases,  12  Rettie  400.  389,  393-394. 

9.  Smith  v.  Reese  River  Co.,  L.  R.  11.  Teachout    v.    VanHoesen,    76 
2  Eq.  264.  Iowa  113,  121,  40  N.  W.  96,  100,  1 


DEFENSES.  459 

It  is  held  in  Clark  v.  Morgan  County  National  Bank  12  that  the 
fact  that  the  plaintiff  has  resold  the  securities  for  as  much  as  or 
even  more  than  he  paid  for  them  is  not  a  defense  to  his  action  to  re- 
cover damages  for  the  false  representations  which  induced  his 
purchase. 

§  252.  Defense  of  election  to  disaffirm. 

It  has  been  held  that  the  commencement  by  the  subscriber  of  an 
action  based  upon  a  disaffirmance  of  his  subscription  is  an  election 
which  is  conclusive  upon  him  and  a  bar  to  a  subsequent  action  for 
damages  for  fraud  and  deceit.13  A  mere  notice  of  disaffirmance 
and  an  offer  to  return  the  shares  is,  if  rejected,  probably  not  a 
conclusive  election.14 

§  253.  Defense  that  plaintiff  might  readily  have  ascertained  the 

truth. 

When  it  is  shown  that  the  plaintiff's  subscription  for,  or  pur- 
chase of,  shares  was  induced  by  a  false  representation  as  to  a  ma- 
terial fact,  it  is  not  a  defense  to  his  action  for  fraud  and  deceit 
that  he  might  by  proper  inquiry  have  ascertained  the  truth.15 

L.  R.  A.  664;  cf.  Alexandra  Oil  &  Colorado. — Zang     v.     Adams,     23 

Dev.    Co.    v.   Cook,   10  Ont.   W.   R.  Colo.  408,  48  Pac.  509,  58  Am.  St. 

781,   785,   affirmed,   11   Ont.   W.    R.  R.   249. 

1054.  Illinois. — Cantwell  v.  Harding,  155 

The  cause  of  action  is,  of  course,  111.   App.  578,   reversed   on   another 

assignable.     Getty  v.  Devlin,  70  N.  ground,  249  111.  354,  94  N.  E.  488. 

Y.  504,  512.  Iowa.— Riley    v.    Bell,    120    Iowa 

12.  196  Fed.  Rep.  709.  618,   95   N.    W.    170;    Howerton    v. 

13.  Clarke    v.    Mercantile    Trust  Augustine,  145  Iowa  246,  121  N.  W. 
Co.,  110  N.  Y.  App.  Div.  901,  904,  373;    Holmes   v.    Rivers,    145    Iowa 
95  Supp.  1118,  (dissenting  opinion),  702,  709,  124  N.  W.  801;  Severson  v. 
and  cases  cited.  Kock,  159  Iowa  343,  140  N.  W.  220. 

14.  Miller    v.    Barber,    66   N.    Y.  Michigan. — Converse  v.  Blumrich, 
558.  14  Mich.  109,  121. 

15.  Federal. — Upton      v.      Engel-  Minnesota — Redding    v.     Wright, 
hart,  3  Dill.  (U.  S.)  496,  500,  28  Fed.  49  Minn.  322,  330,  51  N.  W.  1056. 
Cas.  No.  16,800.  Missouri.— Cottrill   v.    Kruin,   100 


460 


THE  LAW  OF  PROMOTERS. 


"  He  has  a  right  to  retort  upon  his  objector,  *  You,  at  least,  who 
have  stated  what  is  untrue,  or  have  concealed  the  truth,  for  the 
purpose  of  drawing  me  into  a  contract,  cannot  accuse  me  of  want 
of  caution  because  I  relied  implicitly  upon  your  fairness  and  hon- 
esty.' "  16  It  is  on  this  principle  held  that  a  promoter  who  has 


Mo.  397,  13  S.  W.  753,  18  Am.  St. 
Rep.  549 ;  Hornblower  v.  Crandall, 
7  Mo.  App.  220,  232,  affirmed,  78 
Mo.  581;  Union  Nat'l  Bk.  v.  Hunt, 
76  Mo.  439;  Brolaski  v.  Carr,  127 
Mo.  App.  279,  105  S.  W.  284 ;  Snider 
v.  McAtee,  165  Mo.  App.  260,  147 
S.  W.  136. 

New  York. — Delano  v.  Rice,  23 
App.  Div.  327,  330,  48  Supp.  295. 

North  Dakota. — Fargo  Gas  & 
Coke  Co.  v.  Fargo  Gas  &  Electric 
Co.,  4  N.  D.  219,  59  N.  W.  1066, 
37  L.  R.  A.  593. 

Ohio. — Shawnee  Commercial  & 
Savings  Bank  Co.  v.  Miller,  24  Ohio 
C.  C.  198,  213. 

Texas. — Hall  v.  Grayson  County 
Nat'l  Bank,  36  Tex.  Civ.  App.  317, 
325,  81  S.  W.  762,  766-767,  and 
cases  cited. 

Virginia. — West  End  Real  Estate 
Co.  v.  Claiborne,  97  Va.  734,  750- 
751,  34  S.  E.  900,  906;  Bosher  v. 
Richmond  &  H.  Land  Co.,  89  Va. 
455,  461,  16  S.  E.  360,  362,  cited  in 
Weisiger  v.  Richmond  Ice  Machine 
Co.,  90  Va.  795,  797,  20  S.  E.  361. 

United  Kingdom  and  Colonies. — 
Directors  of  Central  Railway  Co.  of 
Venezuela  v.  Kisch,  L.  R.  2  H.  L. 
99,  120-121,  16  L.  T.  N.  S.  500,  and 
cases  cited,  affirming,  Kisch  v.  Cen- 
tral Ry.  Co.  of  Venezuela,  3  DeG. 
J.  &  S.  122,  34  L.  J.  Ch.  N.  S.  545, 
552;  Downes  v.  Ship,  L.  R.  3  H.  L. 


343;  Redgrave  v.  Hurd,  L.  R.  20 
Ch.  Div.  1,  13;  Aaron's  Reefs  v. 
Twiss,  1896,  App.  Gas.  273,  279,  287 ; 
New  Brunswick  &  Canada  Ry.,  etc., 
Co.  v.  Muggeridge,  1  Drewry  & 
Smale  363,  382 ;  Smith  v.  Chadwick, 
L.  R.  20  Ch.  Div.  27,  57,  46  L.  T.  N. 
S.  702,  affirmed,  L.  R.  9  App.  Gas. 
187,  5  Am.  &  Eng.  Corp.  Cas.  23; 
Capel  &  Co.  v.  Sim's  Ships  Com- 
position Co.,  57  L.  J.  Ch.  N.  S.  713, 
716-717;  Components  Tube  Co.  v. 
Naylor,  1900,  2  Ir.  R.  1,  33;  Jury 
v.  Stoker,  L.  R.  9  Ir.  385,  399. 

See  notes  to  Pigott  v.  Graham, 
14  L.  R.  A.  N.  S.  1176,  and  to  Fargo 
Gaslight  &  Coke  Co.  v.  Fargo  Gas 
&  Electric  Co.,  37  L.  R.  A.  593. 

Cf.  Brehm  v.  Sperry,  Jones  &  Co., 
92  Md.  378,  404-405,  48  Atl.  .368, 
373;  Whiting  v.  Price,  172  Mass. 
240,  51  N.  E.  1084,  70  Am.  St.  Rep. 
262,  (cited  in  Honsucle  v.  Ruffin,  172 
Mass.  420,  52  N.  E.  538)  ;  Haskell 
v.  Worthington,  94  Mo.  560,  7  S. 
W.  481;  Schanck  v.  Morris,  30  N. 
Y.  Super.  658;  Warner  v.  Benjamin, 
89  Wis.  290,  62  N.  W.  179;  Dixon's 
Case,  15  L.  T.  N.  S.  651. 

The  failure  of  the  subscriber  to 
investigate  is  likewise  no  defense 
to  an  action  for  the  rescission  of 
his  subscription. 

See  post,  §  260. 

16.  Directors,  etc.,  of  Central  Ry. 
Co.  of  Venezuela  v.  Kisch,  L.  R.  2 
H.  L.  99,  16  L.-  T.  N.  S.  500. 


DEFENSES. 


461 


obtained  subscriptions  by  the  concealment  of  material  contracts, 
cannot  escape  the  consequences  of  his  fraud  by  showing  that  the 
contracts  were  in  some  way  mentioned  in  the  prospectus. 

The  fact  that  a  document  is  mentioned  in  the  prospectus  does 
not  charge  subscribers  with  constructive  notice  of  its  contents.17 
Some  authorities  hold  that  each  subscriber  is  chargeable  with 
knowledge  of  the  contents  of  the  corporate  charter,  and  cannot 
claim  to  have  been  deceived  by  a  misrepresentation  in  relation 
thereto.18  The  better  rule  seems  to  be  that  while  a  subscriber  is 
ordinarily  chargeable  with  knowledge  of  the  contents  of  the  cor- 
porate charter  and  cannot  complain  of  the  failure  of  the  promoters 
to  expressly  inform  him  thereof,  an  affirmative  misrepresentation 
cannot  be  excused  by  showing  that  an  examination  of  the  charter 
would  have  disclosed  its  falsity.19 


17.  Aaron's  Reefs  v.  Twiss,  1896, 
App.    Cas.    273,    287;    Components 
Tube  Co.  v.  Naylor,  1900,  2  Tr.  R. 
1,    33,    78-79;    Langham    v.    East 
Wheal,   etc.,   Min.   Co.,   Ltd.,   37  L. 
J.  Ch.  N.  S.  253. 

See  ante,  §  112. 

Cf.  Hallows  v.  Fernie,  L.  R.  3 
Ch.  App.  467,  477;  Moore  v.  Burke, 
4  F.  &  P.  258. 

18.  Oil  City  Land  &  Improvement 
Co.  v.  Porter,  99  Ky.  254,  35  S.  W. 
643,  18  Ky.  Law.  Rep.  151;  Wight 
v.    Shelby   R.   R.   Co.,   16  B.   Mon. 
(Ky.)    4,  63  Am.   Dec.  522;    Selma 
M.  &  M.  R.  R.  Co.  v.  Anderson,  51 
Miss.  829;  Ellison  v.  Mobile  &  Ohio 
R.  R.  Co.,  36  Miss.  572. 

See  Moore  v.  Burke,  4  F.  &  F. 
258,  287,  where  the  fact  that  the 
plaintiff  was  a  country  clergyman 
who  could  not  be  expected  to  come 
to  the  city  to  make  inquiries,  was 
held  immaterial. 


See  note  to  Fear  v.  Bartlett,  33 
L.  R.  A.  721,  732.  See  also  Ameri- 
can Digest,  Century  Edition  "Cor- 
porations," §  251. 

19.  See  Langham  v.  East  Wheal 
etc.,  Mining  Co.,  Ltd.,  37  L.  J.  Ch. 
N.  S.  253;  Directors,  etc.,  of  Cen- 
tral Railway  of  Venezuela  v.  Kisch, 
L.  R.  2  H.  L.  99,  123,  16  L.  T.  N. 
S.  500,  affirming,  Kisch  v.  Central 
Railway  Co.  of  Venezuela,  3  DeG. 
J.  &  S.  122,  34  L.  J.  Ch.  N.  S.  545, 
551,  552,  (cited  in  Oakes  v.  Tur- 
quand,  L.  R.  2  H.  L.  325,  368,  and 
in  Components  Tube  Co.  v.  Naylor, 
1900,  2  Ir.  R.  1,  40)  ;  Smith  v. 
Chadwick,  L.  R.  20  Ch.  Div.  27,  57, 
46  L.  T.  N.  S.  702,  affirmed,  L.  R. 
9  App.  Cas.  187,  5  Am.  &  Eng.  Corp. 
Cas.  23;  Ex  parte  Briggs,  L.  R.  1 
Eq.  483,  and  see  ante,  §  112. 

Distinction  must  be  made  between 
promises  inconsistent  with  the  char- 
ter, and  false  representations  con- 
tradicted by  it. 


462 


THE  LAW  OF  PROMOTERS. 


It  has  been  held  that  a  subscriber  cannot  claim  to  have  been  de- 
ceived if  the  subject  matter  of  the  promoter's  representations  was 
at  hand  for  inspection  and  the  matter  was  one  within  the  under- 
standing of  the  lay  mind,  or  if  the  subscriber,  not  satisfied  with  the 
representations  of  the  promoter,  instituted  his  own  inquiry  and 
personally  examined  into  the  matter.20 

§  254.  Defense  that  representations   concerning  credit  of    an- 
other are  not  actionable  unless  in  writing.. 
While  statutes  providing  that  representations  in  regard  to  the 
credit,  ability,  trade,  or  dealings  of  another  person  shall  not  be 
actionable  unless  in  writing,  apply  to  representations  inducing  the 
purchase  of  corporate  notes,21  such  statutes  have,  in  most  juris- 
dictions, no  application  to  representations  made  to  induce  a  pur- 
chase of,  or  a  subscription  to,  the  shares  of  a  corporation.22 

§  255.  Defense  of  statute  of  limitations. 

Where  the  subscriber  seeks  relief  in  an  action  at  law  to  recover 
damages  for  fraud  and  deceit  the  only  delay  that  will  bar  his 


20.  West  End  Real  Estate  Co.  v. 
Claiborne,  97  Va.  734,  751,  34  S.  E. 
900,   906;   Mulholland   v.   Washing- 
ton Match  Co.,  35  Wash.  315,  321, 
77  Pac.  497,  499;  Warner  v.  Benja- 
min,  89  Wis.   290,   62   N.   W.   179; 
Jennings    v.    Broughton,    5    DeGex. 
M.    &   G.    126,    affirming,    17    Beav. 
234,   (cited  in  Aberaman  Ironworks 
v.  Wickens,  L.  R.  5  Eq.  485,  506)  ; 
New  Brunswick  &  Canada  Ry.,  etc., 
Co.  v.  Conybeare,  9  H.  L.  Cas.  711, 
and  see  ante,  §  205. 

21.  McKee  v.  Rudd,  222  Mo.  344, 
367-369,    121    S.    W.    312,    319,    133 
Am.   St.  Rep.  529,  and  cases  cited. 

22.  Coulter  v.  Clark,  160  Ind.  311, 


66  N.  E.  739 ;  Grover  v.  Cavanaugh, 
40  Ind.  App.  340,  82  N.  E.  104 ;  Wal- 
ker v.  Russell,  186  Mass.  69,  71  N. 
E.  86,  1  Am.  &  Eng.  Ann.  Cas.  688; 
Huntress  v.  Blodgett,  206  Mass. 
318,  92  N.  E.  427. 

It  is  held  in  Michigan  that  the 
statute  applies  if  the  party  making 
the  representation  has  no  personal 
interest  in  the  transaction,  but  ap- 
parently not  if  he  derives  a  profit 
or  commission  therefrom.  See 
Getchell  v.  Dusenbury,  145  Mich. 
197,  108  N.  W.  723 ;  Diel  v.  Kellogg, 
163  Mich.  162,  128  N.  W.  420,  17 
Det.  Leg.  News  891;  Hubbard  v. 
Oliver,  173  Mich.  337,  139  N.  W. 
77. 


DEFENSES.  453 

remedy  is  that  fixed  by  the  statute  of  limitations.23  Whether  the 
time  to  commence  the  action  is  to  be  computed  from  the  date  of 
the  fraud,  or  from  the  date  of  its  discovery,  depends  upon  the 
provisions  of  the  statute  of  the  particular  forum.24  It  has  been 
held  that  the  statute  runs  from  the  date  when  the  subscription  is 
made,  though  payment  be  postponed  until  a  later  time.25 

§  256.  Defenses  to  suits  for  accounting. 

It  is  held  in  Maxwell  v.  McWilliams  26  that  a  promoter  who 
has  taken  an  unlawful  profit  under  such  circumstances  that  he  may 
be  compelled  to  account  therefor  directly  to  the  subscribers,  can- 
not escape  liability  by  voluntarily  surrendering  such  profits  to  the 
corporation.  His  liability  being  to  the  subscribers  cannot  be 
avoided  by  a  payment  to  the  company. 

The  subscribers  cannot  compel  the  promoter  to  account  to  them 
for  a  profit  which  would,  even  though  acquiesced  in  by  all  the 
complaining  subscribers,  have  constituted  a  fraud  upon  the  corpo- 
ration. The  complaining  subscribers  would  in  such  case,  by  taking 
a  share  of  the  promoter's  unlawful  profit,  make  themselves  parties 
to  the  fraud,  and  the  courts  will  not  assist  them  to  that  end.27 

23.  Peek  v.  Gurney,  L.  R.  6  H.  L.  See  also  note  to  Pletsch  v.  Mil- 
377,  384,  402.  brath,  68  L.  R.  A.  945. 

24.  Higgins  v.  Grouse,  147  N.  T.  25.  Ball  v.  Gerard,  160  N.  Y.  App. 
411,  42  N.  E.  6;  Ball  v.  Gerard,  160  Div.  619,  146  Supp.  81;  Reusens  v. 
N.  Y.  App.  Div.  619,  622,  146  Supp.  Gerard,   160   N.   Y.   App.   Div.   625, 
81 ;  Coffin  v.  Barber,  115  N.  Y.  App.  146  Supp.  86. 

Div.   713,   101   Supp.  147;   Gibbs  v.  26.  145  111.  App.  155,  176,  et  seq. 

Guild,  L.   R.  8  Q.   B.  Div.  296,  af-  27.  See  Travis  v.  Travis,  140  N. 

firmed,  L.  R.  9  Q.  B.  Div.  59.  Y.  App.  Div.  191,  124  Supp.  1021. 

See  the  interesting  discussion  in  Cf.   Mattern   v.   Canavan,  3  Cal. 

Lightfoot  v.  Davis,  198  N.  Y.  261,  91  App.  493,  86  Pac.  618,  where  Smith, 

N.    E.   582,   139   Am.    St.   Rep.   817,  J.,  concurring  in  the  result  arrived 

29  L.  R.  A.  N.  S.  119,  19  Am.  &  Eng.  at  by  the  majority,  said  that  had 

Ann.  Cas.  747,  as  to  the  effect  of  the  corporation  been  made  a  party, 

a    fraudulent    concealment    of    the  as   It   should   have   been,   the  issue 

facts  on  the  running  of  the  statute  of    the    shares    to    the    defendant 

of  limitations.  would   have   been    held   fraudulent 


464  THE  LAW  OF  PROMOTERS. 

This  objection  does  not  arise  if  the  complaining  subscribers 
and  the  guilty  promoters  comprise  all  the  stockholders  of  the  cor- 
poration. 

In  Krohn  v.  Williamson,28  the  promoters  had  by  an  agreement 
with  a  contractor,  received  and  appropriated  to  themselves  a  large 
block  of  the  company's  shares,  which  should  under  the  agreement 
of  all  the  parties,  as  interpreted  by  the  court,  have  been  divided 
pro  rata  among  the  subscribers.  The  plaintiff  subscribers  having 
demanded  an  accounting,  the  defendant  promoters 'objected  that 
if  the  shares  were  to  be  treated  as  belonging  to  the  original  sub- 
scribers they  would  have  to  be  treated  as  issued  without  consider- 
ation, and  that  the  issue  thereof  as  full  paid  stock  constituted  a 
fraud  upon  the  company  which  a  court  of  equity  would  not  coun- 
tenance by  compelling  a  transfer  thereof  from  one  subscriber  to 
another.  The  court  held  that  the  issue  of  stock  was,  however  sub- 
ject to  attack  by  creditors,  entirely  valid  as  between  the  company 
and  its  stockholders.29 

A  different  conclusion  would  perhaps  have  been  reached  by  the 
New  Jersey  courts.30 

§  257.  Defenses  to  actions  for  rescission. — Election  to  affirm. 
The  subscriber's  election,  after  discovery  of  the  fraud,  to  affirm 

and  the  shares  cancelled,  but  that  plaintiff's     subscription      were     in 

as   the   corporation   was   not   made  violation   of    the    statute    requiring 

a  party,  and  its  non-joinder  was  not  that    shares    should   not   be   issued 

objected   to,    it   was   necessary   for  except  for  cash  or  property  equal 

the    court    to    determine    the    con-  in  value  to  the  par  value  thereof, 

troversy  between  the  parties  as  far  is  no  defense  to  a  demand  for  a  re- 

as  it  could  be  done  without  preju-  scission  of  the  subscription  on  the 

dice  to  the  rights  of  others.  ground  of  fraud.     Barcus  v.  Gates, 

See  ante,  §  22.  89  Fed.  Rep.  783,  32  C.  C.  A.  337, 

28.  62    Fed.    Rep.    869,    affirmed,  61  U.  S.  App.  596. 

sub  nom.  Williamson  v.  Krohn,  66  29.  Citing  Scoville  v.  Thayer,  105 

Fed.  Rep.  655,  13  C.  C.   A.  668,  31  U.  S.  143,  153,  26  L.  Ed.  968. 

U.   S.  App.   325.  30.  Volney    v.    Nixon,    68    N.    J. 

The  fact   that  the   terms  of  the  Eq.   605,  60  Atl.   189,  affirming,  67 


DEFENSES. 


465 


his  contract  of  subscription,  is  conclusive  upon  him  and  a  com- 
plete answer  to  a  subsequent  rescission.31  An  election  to  affirm 
a  subscription  cannot  be  inferred  from  any  act  done  before  the 
subscriber  had  knowledge  of  the  fraud,32  but  an  election  made 
with  knowledge  of  the  essential  facts  is  binding  though  some  of  the 
incidents  of  the  fraud  be  not  discovered  until  a  later  time.33  Acts 
of  affirmance  after  the  discovery  of  the  falsity  of  some  represen- 
tations do  not  bar  a  rescission  of  the  subscription  upon  the  subse- 
quent discovery  of  the  falsity  of  other  and  different  represen- 
tations.34 It  has  been  held  that  a  subscriber  is  bound  at  his  peril 
promptly  to  inform  himself  of  the  contents  of  the  charter  and  by- 
laws of  the  corporation  and  will  not  be  heard  to  excuse  his  acts, 
or  his  failure  to  act,  by  a  plea  of  ignorance  thereof.35  It  has  like- 


N.  J.  Eq.  457,  58  Atl.  75;  Tooker  v. 
National  Sugar  Refining  Co.,  80  N. 
J.  Eq.  305,  84  Atl.  10.  See  also 
ante,  §  22. 

31.  Wilson    v.    Hundley,    96    Va. 
96,   101,  30  S.  E.  492,  494,  70  Am. 
St.  Rep.  837,  and  authorities  cited; 
American    Bldg.    &    Loan    Assn.    v. 
Rainbolt,   48   Neb.   434,   440,   67   N. 
W.     493,     and     authorities     cited; 
Clarke  v.  Mercantile  Trust  Co.,  110 
N.  Y.  App.  Div.  901,  95  Supp.  1118, 
(dissenting     opinion),     and     cases 
cited;  Cox  v.  Nat'l  Coal  &  Oil  Inv. 
Co.,   61   W.   Va.  291,  311,  56   S.   E. 
494,  502. 

And  see  post,  §  258. 

32.  City  Bk.  of  Macon  v.  Bartlett, 
71  Ga.  797 ;  Ginn  v.  Almy,  212  Mass. 
486,   500,   99   N.   E.   276;    White   v. 
American   Natl.   Life  Ins.   Co.,   115 
Va.  305,  78  S.  E.  582. 

33.  Wilson    v.    Hundley,    96    Va. 
96,   101-103,  30    S.    E.   492,  494,   70 
Am.  St.  Rep.  837. 

34.  Hunter     v.     French     League 


Safety  Cure  Co.,  96  Iowa  573,  65  N. 
W.  828 ;  Ex  parte  Hale,  55  L.  T.  N. 
S.  670. 

It  was  held  in  Whitehouse's  Case, 
L.  R.  3  Eq.  790,  15  W.  R.  891,  (dis- 
tinguishing Stewart's  Case,  L.  R.  1 
Ch.  App.  574),  that  a  subscriber 
after  demanding  the  cancellation 
of  his  subscription  on  account  of  a 
variance  between  the  prospectus 
and  the  articles  of  association,  and 
having  waived  this  discrepancy  re- 
lying upon  its  being  corrected,  could 
not  later  insist  upon  being  released 
because  of  the  discovery  of  another 
discrepancy,  the  court  saying  that 
the  moment  the  subscriber  puts  him- 
self at  arm's  length  with  the  com- 
pany, he  must  be  taken  to  know 
all  the  discrepancies  upon  which  he 
intends  to  rely. 

35.  Upton  v.  Tribilcock.  91  U.  S. 
45,  54,  23  L.  Ed.  203;  Upton  v. 
Engelhart,  3  Dill.  (U.  S.)  496,  501, 
28  Fed.  Cas.  No.  16800. 

West    End    Real    Estate    Co.    T. 


466 


THE  LAW  OF  PROMOTERS. 


wise  been  held  that  the  subscriber  must  examine  his  stock  certifi- 
cates when  received  by  him,  and  may  be  charged  with  constructive 

notice  of  such  matters  as  appear  upon  the  face  thereof.36 

» 

§  258.  Acts  constituting  election. 

An  election  to  affirm  may  be  manifested  in  many  different 
ways :  3T  by  accepting  the  stock  certificates,38  by  consenting  to  act 
as  a  director  of  the  corporation,39  by  the  acceptance  of  dividends,40 
by  the  payment  of  installments  of  the  subscription  price,41  by  the 


Claiborne,  97  Va.  734,  ^50,  34  S. 
E.  900,  906;  West  End  Real  Estate 
Co.  v.  Nash,  51  W.  Va.  341,  41  S. 
E.  182. 

Oakes  v.  Turquand,  L.  R.  2  H.  L. 
325,  351-352,  369,  and  cases  cited; 
Lawrence's  Case,  L.  R.  2  Ch.  App. 
412;  Kincaid's  Case,  L.  R.  2  Ch. 
App.  412;  Peel's  Case,  L.  R.  2  Ch. 
App.  674;  Wilkinson's  Case,  L.  R. 
2  Ch.  App.  536,  12  W.  R.  499 ;  Shef- 
field's Case,  Johns.  Ch.  451,  5  Jur.  N. 
S.  216;  Sleigh  v.  Glasgow  &  Trans- 
vaal Options,  Ltd.,  Sess.  Gas.  6 
Fraser  420,  427. 

Cf.  Clarksburg,  etc.,  Land  Co.  v. 
Davis,  —  W.  Va.  — ,  86  S.  E.  929; 
Stewart's  Case,  L.  R.  1  Ch.  App. 
574,  and  Webster's  Case,  L.  R.  2 
Eq.  741,  also  Ship's  Case,  2  DeG. 
J.  &  S.  544,  affirmed,  sub  nom. 
Downes  v.  Ship,  L.  R.  3  H.  L.  343. 
The  decision  of  the  House  of  Lords 
in  the  case  last  cited,  turned  en- 
tirely upon  the  fact  that  the  sole 
appellant  had,  himself  been  a  party 
to,  and  therefore  could  not  be  heard 
to  charge  the  subscriber  with  neg- 
ligence in  failing  to  discover,  the 
fraud. 

36.  Nat'l  Park  Bank  v.  Nichols, 


2  Biss.    (U.   S.)    146. 

37.  See    cases    cited    in    note    to 
Fear  v.   Bartlett,  33  L.   R.  A.  721, 
'723.     The  burden  of  proof  is.  upon 
the     party      asserting     affirmance.* 
Commonwealth  Bonding  &  Casualty 
Ins.    Co.    v.   Cator,   —   Texas.   Civ. 
App.  — ,  175  S.  W.  1074;  White  v. 
American   Natl.   Life   Ins.   Co.,   115 
Va.  305,  78  S.  E.  582. 

38.  Cobb    v.    Hatfield,    46    N.    Y. 
533,  536. 

39.  American      Bldg.      &      Loan 
Assn.  v.   Rainbolt,  48  Neb.  434,  67 
N.  W.  493. 

40.  American  Bldg.  &  Loan  Assn. 
v.    Rainbolt,   48  Neb.   434,   440-441, 
67  N.  W.  493,  496,    (citing  Cook  on 
Stock  &  Stockholders,   (2nd  ed.),  § 
198)  ;  Dassler  v.  Rowe,  91  Neb.  637, 
136  N.  W.  846;   Stewart's  Case,  L. 
R.  I.  Ch.   App.  574,  587;  Ex  parte 
Spartali,  17  L.  T.  N.  S.  193. 

41.  Great  Western  Telegraph  Co. 
v.  Bush,  35  111.  App.  213;  Ossippee 
Hosiery    &     Woolen    Mfg.     Co.     v. 
Canney,   54  N.   H.  295;   West  End 
Real    Estate    Co.    v.    Claiborne,    97 
Va.  734,  750,  34  S.  E.  900,  906. 

It  was  held  in  Re  Dunlop-Truf- 
fault   C.    &   T.    Mfg.    Co.,    Ltd.,   13 


DEFENSES. 


467 


payment  of  an  assessment,42  or  even  by  attendance  at  a  stock- 
holders' meeting.43     A  voluntary  discontinuance  of  an  action  for 
a  rescission  has  been  held  an  election  to  affirm  the  subscription.44 
It  was  held  in  Ex  parte  Briggs,45  that  the  making  by  the  sub- 


Times  Law  Rep.  33,  that  the  pay- 
ment of  calls  after  repudiation,  and 
under  a  mistaken  opinion  that  such 
payment  would  place  the  subscriber 
in  a  position  to  recover  the  money 
already  paid,  nevertheless  barred  a 
rescission. 

In  Ripley  v.  Paper  Bottle  Co.,  57 
L.  J.  Ch.  N.  S.  327,  a  subscriber 
who  had  commenced  an  action  for 
the  rescission  of  his  subscription, 
was  by  the  court  allowed  to  pay  a 
call  without  prejudice. 

42.  Marten    v.     Paul     O.     Burns 
Wine  Co.,  99  Cal.  355,  33  Pac.  1107. 

43.  Federal. — In       re       National 
Pressed    Brick   Co.,   212   Fed.    Rep. 
878,  129  C.  C.  A.  398. 

California. — Marten  v.  Paul  O. 
Burns  Wine  Co.,  99  Cal.  355,  33 
Pac.  1107. 

Mississippi. — Perkins  v.  Mer- 
chants' &  Farmers'  Bank,  103  Miss. 
179,  60  So.  131,  Am.  &  Eng.  Ann. 
Cas.,  1915  B.  788;  Wingo  v.  First 
Nat'l  Bank  of  Pontotoc,  —  Miss.  — , 
60  So.  133. 

Pennsylvania. — C.  &  K.  Turnpike 
Road  Co.  v.  McConaby,  16  Serg.  & 
R.  140. 

Texas. — Commonwealth  Bonding 
&  Casualty  Ins.  Co.  v.  Cator,  — 
Tex.  Civ.  App.  — ,  175  S.  W.  1074. 

Virginia. — West  End  Real  Estate 
Co.  v.  Claiborne,  97  Va.  734,  750, 
34  S.  E.  900,  906. 

West    Virginia. — West   End   Real 


Estate  Co.  v.  Nash,  51  W.  Va.  341, 
41  S.  E.  182. 

United  Kingdom  and  Colonies. — 
Foulkes  v.  Quartz  Hill  Consol.  Gold 
Min.  Co.,  1  Cab.  &  E.  156;  see 
Petrie  v.  Guelph  Lumber  Co.,  11 
Can.  S.  C.  450,  15  Am.  &  Eng.  Corp. 
Cas.  487,  affirming,  11  Ont.  App. 
336,  affirming,  2  Ont.  218.  <• 

See  note  to  Perkins  v.  Merchants' 
&  Farmers'  Bank,  Am.  &  Eng.  Ann. 
Cas.,  1915  B.  788,  791. 

There  is,  of  course,  no  election 
if  the  plaintiff  at  the  meeting 
proposes  that  the  deposits  be  re- 
turned to  the  subscribers.  Wontner 
v.  Shairp,  4  C.  B.  404. 

Attendance  at  a  stockholders' 
meeting  after  an  action  for  re- 
scission had  been  commenced  has 
been  held  an  election  and  a  bar 
to  the  action.  Foulkes  v.  Quartz 
Hill  Consol.  Gold  Min.  Co.,  1  Cab. 
&  B.  156. 

The  mere  attendance  at  a  meet- 
ing for  a  few  minutes,  without  tak- 
ing any  part  therein,  does  not  con- 
stitute an  election  to  affirm;  Ex 
parte  Edwards,  64  L.  T.  N.  S.  561. 

Attendance  by  proxy  is  a  sufficient 
election.  Perkins  v.  Merchants'  & 
Farmers'  Bank,  103  Miss.  179,  60 
So.  131,  Am.  &  Eng.  Ann.  Cas.,  1915 
B.  788. 

44.  Reid     v.     London     &     North 
Staffordshire   Fire   Ins.    Co.,   49   L. 
T.  N.   S.  468. 

45.  L.  R.  1  Eq.  483.     See  Camp- 


468  THE  LAW  OF  PROMOTERS. 

scriber  of  a  contract  for  the  sale  of  his  shares,  which  sale  ulti- 
mately fell  through  without  his  fault,  was  an  act  of  acquiescence 
upon  his  part.  A  mere  attempt  to  sell  shares  was  held  in  Stewart's 
Case  46  not  to  constitute  an  affirmance.  A  sale,  before  knowledge 
of  the  fraud,  of  a  portion  of  the  shares  received  under  a  subscrip- 
tion, will  not  defeat  a  rescission  of  the  subscription  as  to  such 
shares  as  are  still  held  by  the  subscriber  at  the  time  when  the  fraud 
is  discovered.47  A  more  serious  question  might  arise  if  there  were 
different  kinds  of  shares  purchased  as  a  part  of  A  single  trans- 
action, for  the  vendor  could  not  in  such  case  be  restored  to  his 
previous  situation,  and  it  would  generally  be  impossible  to  deter- 
mine what  part  of  the  consideration  applied  to  the  shares  of  each 
character.48 

The  approval  by  a  subscriber  of  a  settlement,  between  the  cor- 
poration and  the  promoters,  of  differences  arising  out  of  the  pro- 
moters' fraud,  may  well  bar  a  disaffirmance  of  his  subscription  be- 
cause of  the  same  fraud.49 

A  statement  of  a  subscriber,  after  knowledge  of  the  facts,  that 
he  has  confidence  in  the  management  and  will  stay  with  the  corpo- 
ration, has  been  held  an  election  to  affirm  his  subscription.50  A 
mere  failure  to  act  with  reasonable  promptness  upon  the  discovery 
of  the  fraud  may  amount  to  a  ratification  of  the  subscription  and 

bell   v.    Fleming,   1   Ad.   &   El.   40;  48.  Maturin   v.   Tredinnick,  9   L. 

Dassler  v.  Rowe,  91  Neb.  637,   136  T.  N.  S.  82,  2  New.  R.  514,  10  L. 

N.    W.   846.  T.  N.  S.  331,  4  New.  R.  15. 

The    buying   or    selling    of    other  49.  See    Buker   v.    Leighton    Lea 

shares  in  the  same  company  is  ob-  Assoc.,  18  N.  Y.  App.  Div.  548,  46 

viously  of  no  moment.     Mulholland  Supp.  35,  reversed,  but  on  another 

v.  Washington  Match  Co.,  35  Wash.  point,  164  N.  Y.  557,  58  N.  E.  1085. 

315,  77  Pac.  497.  50.  Wilson    v.    Hundley,    96    Va. 

46.  L.    R.    1    Ch.    App.    574,    583,  96,  100,  30  S.  E.  492,  494,  70  Am. 
(opinion   of  Vice  Chancellor),   and  St.  Rep.  837;  Peek  v.  Derry,  L.  R. 
see  Ex  parte  Edwards,  64  L.  T.  N.  37   Ch.   Div.   541,  576,   reversed   on 
S.   561.  another   point,    sub   nom.   Derry   v. 

47.  Ex  parte  West,  56  L.  T.  N.  S.  Peek,  L.  R.  14  App.  Cas.  337. 
622,  and  cases  cited. 


DEFENSES.  469 

an  election  to  affirm  it.51  Acts  which  would  otherwise  be  sufficient 
for  that  purpose  do  not  constitute  a  ratification  if  induced  by  the 
promise  of  the  guilty  parties  to  expurgate  the  fraud  and  its  con- 
sequences from  the  transaction.52 

The  commencement  by  a  subscriber  of  an  action  for  damages  for 
fraud  and  deceit  in  procuring  the  subscription,  has  been  held  to  be 
a  conclusive  affirmance  of  the  subscription,  and  a  bar  to  a  subse- 
quent rescission.53 

§  259.  Effect  of  election  to  affirm. 

An  election  to  affirm  a  subscription  is  a  mere  consent  to  be 
bound  by  the  provisions  of  the  contract,  and  while  a  bar  to  a 
rescission  and  perhaps  to  an  action  for  damages  against  the  corpo- 
ration,54 is  not  a  bar  to  an  action  for  damages  for  fraud  and  de- 
ceit against  the  individuals  guilty  of  the  fraud.55 

§  260.  Defense  of  laches. 

Laches  on  the  part  of  the  plaintiff  is  a  valid  defense  to  an  action 
in  equity  for  a  rescission.56  While  a  subscriber  desiring  to  rescind 

51.  See  post,  §  261.  29  L.  R.  A.  63,  58  Am.  St.  Rep.  468. 

52.  West  End  Real  Estate  Co.  v.          New  York — Whitney  v.  Allaire,  1 
Claiborne,  97   Va.   734,   752-753,  34  N.    Y.    305,   312;    Potts   v.   Lambie, 
S.    E.   900,   907.          ,  138  App.  Dlv.  144,  122  Supp.  935. 

Or    if   induced    by    a   reasonable         Texas. — Kennedy   v.    Bender,   104 

expectation    that   the   fraud    would  Tex.  149,  135  S.  W.  524. 
be    remedied.     White    v.    American          Virginia. — Wilson  v.  Hundley,  96 

Nat.    Life    Ins.    Co.,    115    Va.    305,  Va.  96,  101,  103-104,  30  S.  E.  492, 

78   S.   E.  582,  citing  Cook  on  Cor-  494,  495,  70  Am.  St.  Rep.  837,  and 

porations,  §  161.  cases  cited. 

53.  Franey   v.    Wauwatosa   Park         United  Kingdom  and   Colonies. — 
Co.,  99  Wis.  40,  74  N.  W.  548.  Arnison    v.    Smith,    L.    R.    41    Cn. 

54.  Wilson    v.    Hundley,    96    Va.  Div.  348,  361. 

96,   103-105,  30   S.   E.  492,   70  Am.  Cf.  Schanck  v.  Morris,  30  N.   Y. 

St.  Rep.  837.  Super.  658. 

55.  Maryland. — McAleer   v.   Hor-  56.  As  to  the  defense  of  laches 
sey,  35  Md.  439,  461.  generally,  see  note  to  Fear  v.  Bart- 

Michigan.— St.  Johns  Mfg.  Co.  v.      lett,  33  L.  R.  A.  721,  724-725. 
Munger,  106  Mich.  90,  64  N.  W.  3,         The  defense  of  laches  was  in  Peek 


470 


THE  LAW  OF  PROMOTERS. 


his  subscription  must  act  promptly  upon  the  discovery  of  the 
fraud,  no  account  will  ordinarily  be  taken  of  the  lapse  of  time  prior 
to  the  discovery  of  the  fraud.57  The  subscriber  is  not  called  upon 
to  suspect  the  promoters  of  violating  their  fiduciary  obligations 
and  will  not  be  held  guilty  of  laches  because,  having  faith  in  the 
promoters,  he  did  not  discover  their  fraud  as  soon  as  he  might.58 


v.  Gurney,  L.  R.  13  Eq.  79,  119,  et 
seq.,  applied  in  an  action  in  equity 
for  damages,  but  this  ruling  was, 
on  appeal,  disapproved  by  the  House 
of  Lords,  (L.  R.  6  H.  L.  377,  384- 
385),  where  it  was  said  that  the 
only  delay  that  would  in  such  case 
act  as  a  bar  would  be  a  delay  for 
the  period  prescribed  by  the  statute 
of  limitations. 

57.  Federal. — Krohn  v.  William- 
son, 62  Fed.  Rep.  869,  876,  affirmed, 
sub  nom.  Williamson  v.  Krohn,  66 
Fed.  Rep.  655,  13  C.  C.  A.  668,  31 
U.  S.  App.  325. 

Iowa. — Hinkley  v.  Sac  Oil  &  Pipe 
Line  Co.,  132  Iowa  396,  409,  107  N. 
W.  629,  634,  119  Am.  St.  R.  564. 

Michigan. — Hamilton  v.  American 
Hulled  Bean  Co.,  143  Mich.  277,  106 
N.  W.  731,  156  Mich.  609,  121  N.  W. 
731. 

Virginia. — Virginia  Land  Co.  v. 
Haupt,  90  Va.  533,  19  S.  E.  168,  44 
Am.  St.  R.  939. 

Washington. — M  ulholland  v. 
Washington  Match  Co.,  35  Wash. 
315,  77  Pac.  497. 

West  Virginia. — Cox  v.  National 
Coal  &  Oil  Investment  Co.,  61  W. 
Va.  291,  310,  56  S.  E.  494,  502. 

United  Kingdom  and  Colonies. — 
Directors,  etc.,  of  Central  Ry.  Co. 
of  Venezuela  v.  Kisch,  L.  R.  2  H. 
L.  99,  112,  125-126,  16  L.  T.  N. 


S.    500;    Peek    v.    Gurney,    L.    R. 

6  H.    L.    377,    384;    Heymann    v. 
European    Central    Ry.    Co.,    L.    R. 

7  Eq.  154,  169;  Taite's  Case,  L.  R. 
3  Eq.  796 ;  Re  Christineville  Rubber 
Estates,  Ltd.,  106  L.  T.  N.   S.  260, 
81   L.   J.   Ch.   N.    S.   63;    Karberg's 
Case,  1892,  3  Ch.  Div.  1,  13-14,  66 
L.  T.  N.   S.  700;   Lawrence's  Case, 
L.   R.  2  Ch.  App.  412,  423;  Ogilvie 
v.   Currie,  37  L.  J.  Ch.  N.   S.  541; 
Ross  v.  Estates  Investment  Co.,  L. 
R.  3  Ch.  App.  682. 

Note  to  Lomita  Land  &  Water 
Co.  v.  Robinson,  18  L.  R.  A.  N.  S. 
1134. 

58.  American  Alkali  Co.  v.  Salom, 
131  Fed.  Rep.  46,  51,  65  C.  C.  A. 
284 ;  Hinkley  v.  Sac  Oil  &  Pipe  Line 
Co.,  132  Iowa  396,  409,  107  N.  W. 
629,  634,  119  Am.  St.  R.  564;  Hig- 
gins  v.  Crouse,  147  N.  Y.  411,  42  N. 
E.  6;  Baker  v.  Lever,  67  N.  Y.  304, 
23  Am.  Rep.  117;  National  Bank  of 
Dakota  v.  Taylor,  5  S.  D.  99,  58 
N.  W.  297.  See  also  West  End 
Real  Estate  Co.  v.  Nash,  51  W.  Va. 
341,  41  S.  E.  182,  citing  West  End 
Real  Estate  Co.  v.  Claiborne,  97  Va. 
734,  34  S.  E.  900.  See  also  Rawlins 
v.  Wickham,  3  DeG.  &  J.  304,  and 
cases  cited  in  foot  note.  And  see 
ante,  §§  153,  253,  but  see  post, 
§  262. 

Cf.  Cedar  Rapids  Insurance  Co.  v. 


DEFENSES. 


471 


The  subscriber  should  investigate  promptly  when  once  his  sus- 
picions have  been  aroused,59  but  mere  rumors  which  the  plaintiff 
has  no  means  of  substantiating  are  not  sufficient  to  put  him  on 
inquiry,60  and  the  ultimate  failure  of  the  enterprise  does  not  neces- 
sarily give  rise  to  any  suspicion  of  fraud  in  the  organization  of 
the  company.61  A  subscriber  will  not  be  charged  with  knowledge 
of  facts  disclosed  at  a  meeting  of  the  stockholders  which  he  did  not 
attend,  and  at  which  his  proxy  was  held  by  one  of  the  guilty  pro- 
moters.62 A  postponement  of  action  at  the  request  of  the  de- 
fendants is  not  laches,63  and  a  period  during  which  negotiations 
for  a  peaceable  settlement  are  pending  cannot  be  charged  to  the 


Butler,  83  Iowa  124,  48  N.  W.  1026, 
where  the  court  fails  to  distinguish 
between  the  assertion  of  fraudulent 
representations  inducing  the  pur- 
chase of  shares  when  rights  of 
creditors  are  involved,  and  the  as- 
sertion of  the  same  claim  when 
rights  of  creditors  are  not  involved. 
See  post,  §  262.  Cf.  also  Peek  v. 
Gurney,  L.  R.  13  Eq.  79,  119,  et 
seq.,  affirmed,  L.  R.  6  H.  L.  377; 
Perkins  v.  Merchants'  &  Farmers' 
Bank,  103  Miss.  179,  60  So.  131, 
Am.  &  Eng.  Ann.  Cas.,  1915  B.  788; 
C.  &  K.  Turnpike  Co.  v.  McConaby, 
16  Serg.  &  R.  140. 

The  subscriber  is  chargeable  with 
notice  of  the  ordinary  and  plain 
meaning  of  a  circular  received  and 
read  by  him.  Scholey  v.  Central 
Ry.  Co.  of  Venezuela,  L.  R.  9  Eq. 
266. 

Greater  vigilance  may  perhaps 
be  demanded  of  a  subscriber  who  is 
also  a  director.  Ex  parte  Munster, 
14  L.  T.  N.  S.  723,  14  W.  R.  957. 

59.  Higgins  v.  Crouse,  147  N.  Y. 
411,  42  N.  E.  6;  Virginia  Land  Co. 
v.  Haupt,  90  Va.  533,  19  S.  E.  168, 


44  Am.  St.  R.  939,  citing  Cook  on 
Corporations,  §  162 ;  Ex  parte  Black- 
stone,  16  L.  T.  N.  S.  273,  and  see 
Skelton's  Case,  68  L.  T.  N.  S.  210. 
But  he  may  await  the  results  of 
an  investigation  undertaken  by  the 
directors  themselves.  Smith's  Case, 
L.  R.  2  Ch.  App.  604. 

60.  Aaron's  Reefs,  Ltd.,  v.  Twiss, 
1896,  App.  Cas.   273,  290,  293,  and 
see  Directors  of  Central  Ry.  Co.  of 
Venezuela  v.  Kisch,  L.   R.  2  H.  L. 
99,  112,  16  L.  T.  N.  S.  500,  also  Hig- 
gins  v.   Crouse,   147   N.   Y.   411,  42 
N.  E.  6 ;  cf.  Ex  parte  Blackstone,  16 
L.  T.  N.  S.  273. 

61.  Higgins  v.  Crouse,  147  N.  Y. 
411,  42  N.  E.  6. 

62.  Virginia  Land  Co.   v.   Haupt, 
90  Va.  533,  19  S.  E.  168,  44  Am.  St 
R.  939. 

The  shareholder  may,  in  general, 
be  charged  with  knowledge  of  what 
was  said  and  done  at  a  meeting  at 
which  he  was  represented  by  proxy. 
See  ante,  §  112n. 

63.  Cox  v.  National  Coal  and  Oil 
Inv.  Co.,  61  W.  Va.  291,  310-^312,  56 
S.  E.  494,  502-503. 


472 


THE  LAW  OF  PROMOTERS. 


complainant  in  estimating  his  laches.64  The  burden  is  upon  the 
party  asserting  laches  to  prove  both  that  the  other  party  had 
knowledge  of  the  facts,  and  that  he  unreasonably  delayed  action.65 

§  261.  Delay  as  defense  to  action  upon  a  rescission. 

The  defense  of  laches  is  an  equitable  doctrine  which  has,  strictly 
speaking,  no  application  to  a  suit  at  law.  If  the  subscriber,  in- 
stead of  bringing  an  action  for  a  rescission  in  equity,  gives  notice 
of  disaffirmance  and  brings  his  suit  at  law  for  money  had  and  re- 
ceived, laches  cannot  be  pleaded  as  a  defense,  but  the  same  result 
is  arrived  at  by  the  application  of  the  rule  that  a  subscriber  wish- 
ing to  rescind  because  of  fraud  must  act  promptly  upon  discover- 
ing the  facts.66 


64.  See  ante,  §  154. 

Nor  will  a  delay  due  to  a  reason- 
able expectation  that  the  fraud  and 
its  consequences  were  to  be  ex- 
purgated from  the  transaction  be 
charged  against  the  complainant. 
See  ante,  §  258. 

65.  Virginia  Land  Co.  v.  Haupt, 
90  Va.  533,  19  S.  E.  168,  44  Am.  St. 
R.  939,  citing  Cook  on  Corporations, 
§  162 ;  In  re  London  &  Staffordshire 
Fire  Ins.  Co.,  L.  R.  24  Ch.  Div.  149, 
154-155,  followed  in  Karberg's  Case, 
1892,  3  Ch.  Div.  1,  5,   66  L.  T.  N.  S. 
184,    reversed    on    another    ground, 
1892,  3  Ch.  Div.  8,  et  seq.,  66  L.  T. 
N.    S.   700,   and   see   Aaron's   Reefs 
v.  Twiss,  1896,  App.  Gas.  273,  295. 

66.  Federal. — Upton      v.      Engel- 
hart,  3  Dill.  (U.  S.)  496,  501-502,  28 
Fed.  Gas.  No.  16,800. 

Alabama. — Southern  States  Fire 
Ins.  &  C.  Co.  v.  De  Long,  178  Ala. 
110,  59  So.  61. 

Colorado. — Zang    v.     Adams,    23 


Colo.  408,  48  Pac.  509,  58  Am.  St. 
R.  249. 

Indiana. — Dynes  v.  Shaffer,  19 
Ind.  165. 

Maryland. — Urner  v.  Sollenberger, 
89  Md.  316,  335,  43  Atl.  810. 

Michigan. — Duffield  v.  E.  T.  Bar- 
num  Wire  &  Iron  Works,  64  Mich. 
293,  301,  31  N.  W.  310,  313. 

Minnesota. — Parsons  v.  McKinley, 
56  Minn.  464,  57  N.  W.  1134. 

Nebraska. — American  B  1  d  g.  & 
Loan  Assn.  v.  Rainbolt,  48  Neb.  434, 
440,  67  N.  W.  493,  495-496. 

New  Jersey. — Dennis  v.  Jones,  44 
N.  J.  Eq.  513,  516,  14  Atl.  913,  6  Am. 
St.  Rep.  899,  and  cases  cited.  Reed 
v.  Benzine-ated  Soap  Co.,  81  N.  J. 
Eq.  182,  86  Atl.  263. 

New  York.— Getty  v.  Devlin,  54  N. 
Y.  403,  414-415;  Cobb  v.  Hatfield, 
46  N.  Y.  533,  537. 

Pennsylvania — Howard,  Receiver 
v.  Turner,  155  Pa.  349,  357,  26  Atl. 
753,  35  Am.  St.  Rep.  883;  Learning 
v.  Wise,  73  Pa.  173. 


DEFENSES. 


473 


§  262.  Rescission  after  insolvency  of  corporation. 

It  is,  after  insolvency  or  bankruptcy  proceedings  have  been  in- 
stituted against  the  corporation,  too  late,  according  to  the  weight 
of  authority,  to  rescind  a  subscription  because  of  the  fraudulent 
representations  by  which  it  was  induced.  When  such  proceedings 
have  been  commenced,  and  it  has  become  clear  that  there  is  noth- 
ing to  be  gained  by  remaining  a  stockholder,  the  temptation  to 
rescind  one's  subscription  and  thus  become  a  creditor  is  strong, 
and  these  belated  complaints  must  necessarily  be  viewed  with  sus- 
picion.67 


Virginia.— Hurt  v.  Miller,  95  Va. 
32,  27  S.  E.  831;  Weisiger  v.  Rich- 
mond Ice  Machine  Co.,  90  Va.  795, 
20  S.  E.  361. 

United  Kingdom  and  Colonies. — 
Aaron's  Reefs  v.  Twiss,  1896,  App. 
Cas.  273,  294,  citing  cases.  (Com- 
pare the  opinion  of  Lord  Watson  in 
the  same  case  at  page  290,  where  he 
cites  Clough  v.  London  &  North- 
western Ry.  Co.,  L.  R.  7  Ex.  26)  ; 
Peek  v.  Gurney,  L.  R.  6  H.  L.  377, 
384;  Davidson  v.  Tulloch,  3  Macq. 
783,  789,  2  L.  T.  N.  S.  97;  Gibson's 
Case,  2  DeG.  &  J.  275. 

And  see  ante,  §  157. 

This  is  particularly  true  where 
the  stock  is  of  a  speculative  char- 
acter and  likely  to  fluctuate  in 
value.  Keelyn  v.  Strieder,  148  I1L 
App.  238,  247,  and  cases  cited. 

Where  there  is  no  dispute  as  to 
the  facts,  the  question  as  to  what  is 
an  undue  delay  is  a  question  of  law. 
Learning  v.  Wise,  73  Pa.  173. 

Delay  is  to  be  charged  only  from 
the  time  that  the  subscriber  ac- 
quires knowledge  of  the  fraud. 
Aaron's  Reefs  v.  Twiss,  1896,  App. 
-Cas.  273,  290. 


An  offer  to  surrender  his  shares 
made  upon  the  discovery  of  one 
fraud,  will  not  avail  the  subscriber 
when  he  claims  a  rescission  because 
of  another  fraud  which  he  did  not 
discover  until  a  later  time.  Upton 
v.  Tribilcock,  91  U.  S.  45,  54,  23 
L.  Ed.  203,  and  cases  cited. 

It  is  held  in  American  Bldg.  & 
Loan  Assn.  v.  Rainbolt,  48  Neb. 
434,  441,  67  N.  W.  493,  that  a  plain- 
tiff bringing  his  suit  at  law  upon 
a  rescission  must  plead  and  prove  a 
rescission  within  season,  and  that 
a  waiver  by  delay  may  be  shown 
under  a  general  denial. 

67.  Federal. — Upton  v.  Hans- 
brough,  3  Biss.  417,  425-426,  28 
Fed.  Cas.  16801;  Mlchener  v.  Pay- 
son,  13  Natl.  Bkcy.  Reg.  49,  17  Fed. 
Cas.  9524 ;  Chubb  v.  Upton,  95  U.  S. 
665,  24  L.  Ed.  523;  Ogilvie  v.  Knox 
Ins.  Co.,  22  How.  380,  16  L.  Ed. 
349. 

Georgia. — Howard  v.  Glenn,  85 
Ga.  238,  11  S.  E.  610,  21  Am.  St 
Rep.  156. 

Idaho. — Meholin  v.  Carlson,  17 
Idaho  742,  107  Pac,  755,  134  Am. 
St  Bep.  286. 


474 


THE  LAW  OF  PROMOTERS. 


The  rescission  is,  however,  effectual  if  the  subscriber  has  ex- 
ercised due  diligence  in  the  discovery  of  the  fraud,  acted  promptly 
thereon,  and  taken  action  before  the  insolvency  or  bankruptcy 


Michigan. — Bissell  v.  Heath,  98 
Mich.  472,  57  N.  W.  585. 

New  York. — Ruggles  v.  Brock,  6 
Hun  164. 

Pennsylvania. — Howard,  Receiver 
v.  Turner,  155  Pa.  349,  26  AtL  753, 
35  Am.  St.  Rep.  883. 

Virginia. — Martin  v.  South  Salem 
Land  Co.,  94  Va.  28,  49,  et  seq.,  26 
S.  E.  591;  Jordan  v.  Annex  Cor- 
poration, 109  Va.  625,  64  S.  E.  1050, 
17  Am.  &  Eng.  Ann.  Cas.  267. 

United  Kingdom  and  Colonies. — 
Oakes  v.  Turquand,  L.  R.  2  H.  L. 
325,  affirming,  In  re  Overend,  Gurney 

6  Co.,  L.  R.  3  Eq.  576;  Henderson 
v.  Royal  British  Bank,  7  El.  &  Bl. 
356;  Stone  v.  City  &  County  Bank, 
L.  R.  3  C.  P.  D.  282 ;  Peek  v.  Gurney, 
L.  R.  13  Eq.  79,  118-119,  affirmed, 
L.    R.   6   H.   L.   377;    Nicol's   Case, 
3  DeG.  &  J.  387,  430,  et  seq.;  Kent 
v.    Freehold    Land    &    Brickmaking 
Co.,  L.  R.  3  Ch.  App.  493;  Tennent 
v.  City  of  Glasgow  Bank,   L.   R.  4 
App.  Cas.  615;  Houldsworth  v.  City 
of  Glasgow  Bank,  L.  R.  5  App.  Cas. 
317;   Wright's  Case,   L.   R.   12   Eq. 
331,    (but  see  Wright's  Case,  L.  R. 

7  Ch.  App.  55,  41  L.  J.   Ch.  N.   S. 
1)  ;  In  re  Scottish  Petroleum  Co.,  L. 
R.  23  Ch.  Div.  413,  49  L.  T.  N.  S. 
348,  31  W.  R.  846;  Burgess's  Case, 
L.  R.  15  Ch.  Div.  507,  49  L.  J.  Ch. 
N.  S.  541,  43  L.  T.  N.  S.  45,  28  W. 
R.  792;  Ashley's  Case,  L.  R.  9  Eq. 
263;  Ogilvie  v.  Currie,  37  L.  J.  Ch. 
N.  S.  541,  543-544. 

See  also  cases  cited  in  succeeding 


notes.  And  see  note  to  Fear  v. 
Bartlett,  33  L.  R.  A.  721,  726,  et  seq.; 
note  to  Gress  v.  Knight,  31  L.  R. 
A.  N.  S.  900;  note  to  Chamber- 
lain v.  Trogden,  16  Am.  &  Eng.  Ann. 
Cas.  177,  178.  But  see  cases  cited 
under  note  73. 

Cf.  Marion  Trust  Co.  v.  Blish, 
170  Ind.  686,  84  N.  E.  814,  18  L.  R. 
A.  N.  S.  347,  (and  cases  cited  in. 
note),  in  effect  reversing  Marion 
Trust  Co.  v.  Blish,  79  N.  E.  415; 
Ramsey  v.  Thompson  Mfg.  Co.,  116 
Mo.  313,  22  S.  W.  719;  Hall  v.  Old 
Talargoch  Lead  Mining  Co.,  L.  R. 
3  Ch.  Div.  749,  45  L.  J.  Ch.  N.  S. 
775,  34  L.  T.  N.  S.  901,  also  Ship's 
Case,  2  DeG.  J.  &  S.  544,  affirmed, 
sub  nom.  Downes  v.  Ship,  L.  R.  3 
H.  L.  343. 

It  is  under  the  English  Companies 
Act  of  1862,  immaterial  that  the  as- 
sets are  sufficient  to  pay  all  credi- 
tors, Burgess's  Case,  L.  R.  15  Ch. 
Div.  507,  49  L.  J.  Ch.  N.  S.  541,  43 
L.  T.  N.  S.  45,  28  W.  R.  792.  See 
In  re  Scottish  Petroleum  Co.,  L.  R. 
23  Ch.  Div.  413,  437,  49  L.  T.  N.  S. 
348,  31  W.  R.  846. 

In  New  York  the  subscriber  may, 
if  diligent,  rescind  his  subscription 
after  receivership,  if  the  assets  in 
the  hands  of  the  receiver  are  suffi- 
cient to  pay  all  the  creditors. 
Dunn  v.  Candee,  98  N.  Y.  App.  Div. 
317,  90  Supp.  674. 

It  has  been  held  that  when  an  ac- 
tion has  been  brought  against  the 
company  by  a  creditor,  and  an  at- 


DEFENSES. 


475 


proceedings  were  commenced.  As  to  the  nature  of  the  action  nec- 
essary to  save  the  subscriber's  rights,  the  courts  of  this  country 
and  of  England  are  not  in  accord. 

In  England,  where  the  matter  is  to  some  extent  controlled  by 
statute,  it  is  not  sufficient  to  show  that  the  subscriber  had  before 
the  commencement  of  the  insolvency  proceedings  given  notice  of 
rescission,  but  he  must  to  save  his  rights,  have  instituted  legal 
proceedings  to  have  his  name  removed  from  the  rolls.68  An  ex- 
ception is  made  if  the  subscriber,  after  repudiating  his  subscrip- 


tachment  levied  against  the  moneys 
due  from  a  ,subscriber  upon  his  sub- 
scription, the  subscriber  will  not  be 
allowed  as  against  such  creditor  to 
plead  that  his  subscription  was  in- 
duced by  fraud.  Saffold,  garnishee, 
v.  Barnes,  39  Miss.  399.  See  note  to 
Fear  v.  Bartlett,  33  L.  R.  A.  721, 
724,  726. 

If  the  subscriber  has,  by  delay, 
lost  his  right  to-  rescind  his  sub- 
scription, it  is,  in  an  action  brought 
against  him  upon  his  subscription 
by  the  assignee  of  the  insolvent 
corporation,  no  defense  that  the 
moneys  sought  to  be  collected  are 
in  part  to  be  applied  to  the  very 
obligations  to  the  promoters,  the 
fraudulent  nature  of  which  would, 
had  he  acted  promptly,  have  en- 
titled the  subscriber  to  rescind  his 
subscription.  TJrner  v.  Sollenberger, 
89  Md.  316,  43  Atl.  810. 

The  subscriber  may  defend  an 
action  brought  against  him  by  the 
receiver  of  the  insolvent  corpora- 
tion to  recover  the  subscription 
price,  by  showing  that  the  conditions 
of  the  subscription  agreement  have 
not  been  performed.  Hollander  v. 
Heaslip,  222  Fed.  Rep.  808,  137  C.  C. 
A.  1. 


68.  Reese  River  Mining  Co.  v. 
Smith,  L.  R.  4  H.  L.  64,  affirming, 
Smith's  Case,  L.  R.  2  Ch.  App.  604; 
In  re  Scottish  Petroleum  Co.,  L.  R. 
23  Ch.  Div.  413,  433,  437,  439,  49  L. 
T.  N.  S.  348,  31  W.  R.  846;  Hender- 
son v.  Lacon,  L.  R.  5  Eq.  249,  17 
L.  T.  N.  S.  527;  Hare's  Case,  L.  R. 
4  Ch.  App.  503;  Kent  v.  Freehold 
Land  and  Brickmaking  Co.,  L.  R.  3 
Ch.  App.  493;  Whiteley's  Case, 
1899,  1  Ch.  Div.  770;  Re  Lennox 
Publishing  Co.,  Ltd.,  62  L.  T.  N.  S. 
791;  Karberg's  Case,  1892,  3  Ch. 
Div.  1,  10,  66  L.  T.  N.  S.  700;  Peek 
v.  Gurney,  L.  R.  13  Eq.  79,  119,  (af- 
firmed, L.  R.  6  H.  L.  377),  and  cases 
cited. 

The  fact  that  the  subscriber,  be- 
fore the  commencement  of  the  in- 
solvency proceedings,  had  success- 
fully resisted  an  action  for  calls, 
does  not  save  his  right  to  have  his 
name  stricken  from  the  rolls.  In  re 
Etna  Ins.  Co.,  Ltd.,  Ir.  Rep.  6  Eq. 
298,  and  see  Ex  parte  Stevenson,  16 
W.  R.  95. 

The  pleading  of  a  counterclaim 
demanding  rescission  would  save 
this  right.  Whiteley's  Case,  1900,  1 
Ch.  Div.  365. 


476  THE  LAW  OF  PROMOTERS. 

tion,  agreed  with  the  company  to  take  no  action  pending  the  out- 
come of  the  suit  of  another  shareholder  similarly  situated.69  The 
complaining  subscriber  is,  in  that  case,  to  all  intents  and  purposes 
a  party  to  the  suit  of  the  other  shareholder,  and  a  rule  that  his 
right  to  rescind  is  lost  by  a  failure  to  commence  his  own  suit, 
would  necessitate  useless  litigation. 

The  subscriber's  rights  are,  of  course,  preserved  if  his  no- 
tice of  repudiation  is  accepted  by  the  directors.  His  subscrip- 
tion is  in  such  case  effectually  cancelled,  and  the  cancellation 
may  be  insisted  upon  though  the  corporation  is  afterwards  de- 
clared insolvent.70  The  subscriber  may  likewise  save  his  rights 
by  repudiating  his  subscription  before  it  has  become  a  completed 
binding  contract.71 

A  rule  more  liberal  to  the  subscriber  is  generally  recognized 
in  this  country.  Our  courts  hold  that  if  the  subscriber  has  ex- 
ercised due  diligence  both  in  discovering  the  fraud  and  in  taking 
action  after  such  discovery,  and  has  actually  given  notice  of  the 
rescission  of  his  subscription  before  corporate  insolvency  or  bank- 
ruptcy proceedings  are  instituted,  he  may,  after  the  commence- 
ment of  such  proceedings,  plead  his  rescission  as  a  defense  if 

69.  Pawle's    Case,    L.    R.    4    Ch,  Co.  v.  Smith,  L.  R.  4  H.  L.  64,  74, 
App.  497;  In  re  Scottish  Petroleum  77;  Blake's  Case,  34  Beav.  639,  34 
Co.,  L.  R.  23  Ch.  Div.  413,  433,  437,  L.  J.  Ch.  N.  S.  278,  13  W.  R.  486. 
49  L.  T.  N.  S.  348,  31  W.  R.  846;  See  also  McDermott  v.  Harrison,  56 
McNiell's  Case,   L.   R.   10   Eq.   503;  Hun   (N.   Y.)   640,  9  Supp.  184,  30 
Re  Lennox  Publishing  Co.,  Ltd.,  62  St.  R.  324;   Bohn  v.  Burton  Lingo 
L.  T.  N.  S.  791 ;  In  re  Estates  In-  Co.,  —  Tex.  Civ.  App.  — ,  175  S.  W. 
vestment  Co.,  38  L.  J.  Ch.  N.  S.  318.  173. 

There  must,  however,  be  a  formal  An  agreement  that  the  sub- 
binding  repudiation.  Skelton's  Case,  scriber's  shares  should  be  trans- 
68  L.  T.  N.  S.  210.  ferred  to  the  promoters  will  not 

70.  Wright's   Case,   L.   R.    7   Ch.  save  him   from  liability  as  a   con- 
App.  55,  41  L.  J.  Ch.  N.  S.  1;  Fox's  tributory   if   the   transfer   was   not 
Case,  L.  R.  5  Eq.  118;  Re  Lennox  entered   on  the  register.     Walker's 
Publishing  Co.,  Ltd.,  62  L.  T.  N.  S.  Case,  L.~R.  6  Eq.  30. 

791.    See  Reese  River  Silver  Mining         71.  Pentelow's  Case,  L.  R.  4  Ch. 

App.  178. 


DEFENSES. 


477 


sued  for  calls  or  other  liability  thereon,  or  file  his  claim  for  the 
return  of  the  moneys  paid  upon  his  subscription.72  Some  cases 
go  even  further  and  hold  that  if  the  subscriber  shows  that  he  has 
exercised  due  diligence  in  discovering  the  fraud,  and  acted 
promptly  upon  such  discovery,  the  pendency  of  insolvency  or 
bankruptcy  proceedings  does  not  bar  his  action  for  a  rescission 
though  begun  before  notice  of  disaffirmance.78 

It  follows,  from  what  has  been  said,  that  the  fact  that  the  com- 
pany is  at  the  time  of  the  trial  insolvent,  is  neither  in  this  country, 
nor  in  England,  a  defense  to  a  subscriber's  suit  for  a  rescission 
if  no  insolvency  or  bankruptcy  proceedings  are  pending.74 


72.  Upton  v.  Tribilcock,  91  U.  S. 
45,  56,   23  L.   Ed.   203,    (dissenting 
opinion)  ;    Upton    v.    Engelhart,    3 
Dill.   (U.  S.)  496,  505,  28  Fed.  Gas. 
16,800 ;  Hinkley  v.  Sac  Oil  and  Pipe 
Line    Co.,    132    Iowa    396,    410-411, 
107  N.  W.  629,  634-635,  119  Am.  St. 
R.    564;    Fear   v.   Bartlett,   81    Md. 
435,  443,  32   Atl.   322,  33  L.  R.   A. 
721,  724 ;  Savage  v.  Bartlett,  78  Md. 
561,  28  Atl.  414;  Johns  v.  Coffee,  74 
Wash.  189,  196-197,  133  Pac.  4,  7, 
affirmed   on   reargument,   77   Wash. 
700,  137  Pac.  808. 

It  was,  however,  in  a  Georgia 
case,  held  that  the  subscriber  could 
not  rescind  as  to  creditors  who  be- 
came such  after  the  making  of  his 
subscription.  Turner  v.  Grangers' 
Life  &  Health  Ins.  Co.,  65  Ga.  649, 
38  Am.  Rep.  801,  quoted  in  Hamil- 
ton v.  Grangers'  Life  &  Health  Ins. 
Co.,  67  Ga.  145.  See  also  Bohn  v. 
Burton  Lingo  Co.,  —  Tex.  Civ.  App. 
— ,  175  S.  W.  173. 

73.  Newton     National     Bank     v. 
Newbegin,  74  Fed.  Rep.  135, 140-141, 
20  C.  C.  A.  339,  40  U.  S.  App.  1,  33 
L.    R.    A.    727;    Farrar   v.    Walker, 


3  Dill.  (U.  S.)  506,  510;  Wallace  v. 
Bacon,  86  Fed.  Rep.  553;  Stuffle- 
beam  v.  De  Lashmutt,  101  Fed. 
Rep.  367;  (but  see  Scott  v.  Deweese, 

181  U.    S.    202,   45   L.    Ed.   822,    21 
Sup.    Ct.    585;    Lantry    v.    Wallace, 

182  U.   S.   536,  45  L.   Ed.   1218,   21 
Sup.  Ct.  878)  ;  People  v.  California 
Safe  Deposit  &  Trust  Co.,  19  Cal. 
App.    414,    126    Pac.    516;    Beal    v. 
Dillon,  5  Kan.  App.  27,  47  Pac.  317 ; 
Ramsey  v.  Thompson  Mfg.  Co.,  116 
Mo.  313,  22  S.  W.  719,  citing  Has- 
kell  v.  Worthington,  94  Mo.  560,  7 
S.  W.  481. 

The  decision  of  this  question  was 
reserved  in  Fear  v.  Bartlett,  81  Md. 
435,  444,  32  Atl.  322,  33  L.  R.  A. 
721,  725. 

74.  Hinkley  v.  Sac  Oil  and  Pipe 
Line  Co.,  132  Iowa  306,  410-412, 
107  N.  W.  629,  634-635,  119  Am.  St. 
R.  564,  and  see  In  re  London  and 
Leeds  Bank,  56  L.  J.  Ch.  N.  S.  321, 
56  L.  T.  N.  S.  115,  35  W.  R.  344. 

The  question  seems  in  Georgia, 
and  to  some  extent  in  West  Virginia, 
to  depend  upon  whether  or  not  there 
are  creditors  who  became  such  after 


478 


THE  LAW  OF  PROMOTERS. 


We  have  seen  that  the  fact  that  the  subscriber  might  have  dis- 
covered the  fraud  more  quickly  is,  in  an  action  against  the  company 
or  its  promoters,  not  material  provided  that  he  acted  with  due 
diligence  upon  its  discovery.75  As  against  the  creditors,  the 
subscriber  will  be  held,  not  only  to  prompt  action  upon  the  dis- 
covery of  the  fraud,  but  to  reasonable  diligence  in  making  such 
discovery.76 

§  263.     Defense  that  oral  representations  were  merged  in  sub- 
scription agreement. 

The  point  has  been  raised,  and  was  sustained  in  Smith  v.  South- 
ern Building  &  Loan  Association,77  that  where  a  subscription 
agreement  is  plain  and  unambiguous  and  embraced  in  a  writing 
apparently  containing  the  entire  contract  of  the  parties,  a  sub- 
scriber cannot  avoid  liability  thereon,  by  proof  of  misstatements 
made  in  a  prospectus  not  referred  to  in  the  subscription  agree- 


the  making  of  the  subscription 
under  consideration.  Gress  v. 
Knight,  135  Ga.  60,  68  S.  E.  834,  31 
L.  R.  A.  N.  S.  900 ;  Wilkes  v.  Knight, 
142  Ga.  458,  83  S.  E.  89;  Turner  v. 
Grangers'  Life  and  Health  Insur- 
ance Co.,  65  Ga.  649,  38  Am.  Rep. 
801;  Southern  Tobacco  Co.  v.  Arm- 
strong, 11  Ga.  App.  501,  75  S.  E. 
828;  Morrissey  v.  Williams,  74  W. 
Va.  636,  82  S.  E.  509;  Scott  v. 
Williams,  74  W.  Va.  635,  82  S.  E. 
511. 

75.  See  ante,  §  260. 

76.  Federal. — Upton      v.      Engle- 
hart,  3  Dill.  496,  28  Fed.  Cas.  16,- 
800;  Farrar  v.  Walker,  3  Dill.  506; 
Upton  v.  Tribilcock,  91  U.  S.  45,  54, 
23  L.  Ed.  203;  Chubb  v.  Upton,  95 
U.  S.  665,  667,  24  L.  Ed.  523 ;  Bartol 
v.   Walton   &   Whann  Co.,  92   Fed. 
Rep.  13,  20-21. 


Iowa. — Hinkley  v.  Sac  Oil  &  Pipe 
Line  Co.,  132  Iowa  396,  409,  107 
N.  W.  629,  634,  119  Am.  St.  R.  564 ; 
Cedar  Rapids  Ins.  Co.  v.  Butler,  83 
Iowa  124,  48  N.  W.  1026. 

Michigan. — Duffield  v.  E.  T.  Bar- 
num  Wire  &  Iron  Works,  64  Mich. 
293,  301-302,  31  N.  W.  310,  313-314, 
and  cases  cited. 

Virginia. — Weisiger  v.  Richmond 
Ice  Machine  Co.,  90  Va.  795,  20  S. 
E.  361 ;  Martin  v.  South  Salem  Land 
Co.,  94  Va.  28,  52-53,  26  S.  E.  591, 
598. 

United  Kingdom  and  Colonies. — 
Ashley's  Case,  L.  R.  9  Eq.  263;  Di- 
rectors of  Central  Ry.  Co.  of  Vene- 
zuela v.  Kisch,  L.  R.  2  H.  L.  99,  125, 
16  L.  T.  N.  S.  500;  Nicol's  Case,  3 
DeG.  &  J.  387,  441. 

77.  Ill  Ga.  811,  35  S.  E.  707. 


DEFENSES.  479 

ment.  The  same  contention  was  made  in  Hinkley  v.  Sac  Oil  & 
Pipe  Line  Company,78  and  the  Southern  Building  &  Loan  Asso- 
ciation case  was  cited.  The  Supreme  Court  of  Iowa  said,  "  We 
are  confident  that,  had  the  court  (in  the  Southern  Building  and 
Loan  Association  case)  undertaken  to  state  its  reasons  for  such  a 
conclusion,  a  different  result  would  have  been  reached.  At  any 
rate  the  current  of  authority  is  that  the  general  rule  to  the 
effect  that  parol  representations  are  not  admissible  to  vary  the 
terms  of  a  written  agreement  has  no  application  to  those  represen- 
tations which  amount  to  a  fraud  on  the  part  of  the  company,  were 
made  at  the  time  of  subscribing,  and  were  the  inducements  by 
which  the  subscribers  were  obtained.79  This  is  for  the  very  satis- 
factory reason  that  the  parol  evidence  is  not  introduced  to  vary 
or  contradict  the  written  application  or  contract,  but  to  show  that 
none  such  was  even  properly  made." 

The  apparent  effect  of  a  subscription  agreement  cannot  be  de- 
feated by  proof  of  oral  representations  as  to  its  legal  effect  and 
as  to  the  liability  of  the  subscriber  thereunder,  nor  by  proof  of 
parol  promises  that  the  obligations  thereof  would  not  be  en- 
forced against  the  particular  subscriber,  nor  by  proof  that 
collateral  promises  made  at  the  time  of  the  subscription  and  as 
an  inducement  thereof,  were  not  performed.80  The  agreement 

78.  132  Iowa  396,  407,  107  N.  W.  29  N.  J.  Eq.  188,  (affirmed,  29  N.  J. 
629,  633,  119  Am.  St.  R.  564.  Eq.  651)  ;  Custar  v.  Titusvllle  G.  & 

79.  Citing  First  National  Bank  v.  W.  Co.,  63  Pa.  381 ;  Blodgett  v.  Mor- 
Hurford,    29    Iowa    579;    Davis    v.  rill,  20  Vt.  509. 

Dumont,  37  Iowa  47 ;  Rives  v.  Mont-  80.  Alabama. — Smith     v.     Tallas- 

gomery  Plank  Road  Co.,  30  Ala.  92 ;  see,  etc.,  Plank  Road  Co.,  30  Ala. 

Martin  v.   Railway,  8  Fla.   370,  73  650,  667. 

Am.   Dec.  713;   Miller  v.  Wild  Cat  Arkansas. — Mississippi,  etc.,  R.  R. 

Gravel    Road    Co.,    57     Ind.     241 ;  Co.  v.  Cross,  20  Ark.  443,  454. 

Kennebec  &  P.  R.  R.  Co.  v.  Waters,  Illinois.— Jewell    v.     Rock    River 

34  Me.  366;  Water  Valley  Mfg.  Co.  Paper  Co.,  101  111.  57,  68. 

v.  Seaman,  53  Miss.  655 ;  Piscataqua  Kentucky.— Wight  v.  Shelby  R.  R. 

Ferry  Co.  v.  Jones,  39  N.  H.  491;  Co.,  16  B.  Mon.  (Ky.)  4,  63  Am.  Dec. 

Vreeland  v.  New  Jersey  Stone  Co., 


480 


THE  LAW  OF  PROMOTERS. 


may,  however,  be  avoided  by  proof  that  the  subscription  was  pro- 
cured by  false  representations  in  regard  to  the  substance  of  the 
shares  to  be  received  thereunder.81 


522;  Tanner  v.  Nichols,  25  Ky.  L. 
R.  2191,  80  S.  W.  225. 

Maine. — Kennebec  &  Portland  R. 
R.  Co.  v.  Waters,  34  Me.  366. 

Mississippi. — Thigpen  v.  Miss. 
Cent.  R.  R.  Co.,  32  Miss.  347. 

Missouri. — Joy  v.  Manion,  28  Mo. 
App.  55. 

New  Hampshire. — Shattuck  v. 
Robbins,  68  N.  H.  565,  44  Atl.  694. 

Pennsylvania. — Miller  v.  Hanover 
Jctn.,  etc.,  R.  R.  Co.,  87  Pa.  95,  30 
Am.  Rep.  349. 

Vermont. — Connecticut  &  Pass. 
Rivers  R.  R.  Co.  v.  Bailey,  24  Vt. 
465,  58  Am.  Dec.  181. 

West  Virginia. — Clarksburg,  etc., 
Land  Co.  v.  Davis,  —  W.  Va.  — ,  86 
S.  E.  929. 

Wisconsin. — Rehbein  v.  Rahr,  109 
Wis.  136,  85  N.  W.  315. 

United  Kingdom  and  Colonies. — 
Sheffield's  Case,  Johns.  Ch.  451,  5 
Jur.  N.  S.  216. 

See  also  ante,  §§  70,  219. 

See  also  note  to  Fear  v.  Bartlett, 
33  L.  R.  A.  721,  732,  and  note  to 
Minneapolis  Threshing  Machine  Co. 


v.  Davis,  3  L.  R.  A.  796. 

Cf.  Bobzin  v.  Gould  Balance 
Valve  Co.,  140  Iowa  744,  118  N.  W. 
40. 

An  opinion  as  to  the  effect  of  the 
subscription  agreement,  expressed 
by  one  of  the  dommissioners  ap- 
pointed by  the  act  of  incorporation 
to  receive  subscriptions,  is  inadmis- 
sible. Hall  v.  Selma  &  Tenn.  R.  R. 
Co.,  6  Ala.  741. 

Proof  of  an  oral  representation  as 
to  the  effect  of  the  subscription  paper 
has  been  admitted  where  the  sub- 
scriber was  illiterate  and  unable  to 
read  the  instrument.  Wert  v.  Craw- 
fordsville,  etc.,  Turnpike  Co.,  19  Ind. 
242. 

81.  The  distinction  is  pointed  out 
in  Collins  v.  Southern  Brick  Co.,  92 
Ark.  504,  123  S.  W.  652,  135  Am. 
St.  Rep.  197.  See  also  Common- 
wealth Bonding  &  Casualty  Ins.  Co. 
v.  Cator,  —  Tex.  Civ.  App.  — ,  175 
S.  W.  1074. 

See  Chamberlayne  on  the  Modern 
Law  of  Evidence,  §  3556. 

See  also  ante,  §  238,  ct  seq. 


CHAPTER  XIV. 

Or  THE  MEASURE  OF  RECOVERY. 

Section  264.  Measure  of  recovery  in  case  of  unlawful  sale  of  promoter's 
property  to  corporation. 

265.  In  action  for  accounting  for  profits. 

266.  The  same  subject. — Allowance  as  compensation  for  services. 

267.  Unlawful  commissions,  bribes,  etc. 

268.  Measure   of   recovery  upon   rescission. 

269.  Measure  of  damages  in  case  of  false  representations. 

270.  Measure  of  value  of  shares. 

271.  Measure  of  value  of  bonds. 

272.  Value  of  property  sold  to  corporation. 

273.  The  same  subject. — Market  value  the  standard. 

274.  The  same  subject. — Proof  of  value. 

275.  Measure  of  value  of  property  paid  for  by  subsequent  issue 
of  mortgage  bonds. 

276.  Measure  of  recovery  in  minority  stockholders'  suits. 

277.  Measure  of  damages  in  action  for  fraud  in  sale  of  shares. 

§  264.  Measure  of  recovery  in  case  of  unlawful  sale  of  pro- 
moter's property  to  corporation. 

The  sum  to  be  recovered  by  the  corporation  in  case  of  the  un- 
lawful sale  to  it  of  the  promoter's  own  property,  depends  upon 
the  circumstances  of  the  case;  that  is  whether  the  promoter  ac- 
quired the  property  before  he  became  such  and  is  to  be  con- 
sidered as  having  made  an  unlawful  sale  of  his  own  property  to 
the  corporation,  or  whether  he  acquired  the  property  after  he 
entered  upon  the  fiduciary  relation  of  promoter  to  the  corpora- 
tion and  should  have  made  the  purchase  for  its  benefit.1 

1.  Central     Trust    Co.     v.     East      743,  748 ;  Old  Dominion  Copper,  etc., 
Tennessee  Land  Co.,  116  Fed.  Rep.      Co.  v.  Bigelow,  203  Mass.  159,  202, 

(481) 


482 


THE  LAW  OF  PROMOTERS. 


If  the  property  sold  to  the  corporation  belonged  to  the  pro- 
moter before  he  entered  upon  the  fiduciary  relation,  the  corpora- 
tion is  not  entitled  to  the  benefit  of  his  purchase,  and  the  limit  of 
its  recovery,  unless  upon  a  rescission  of  its  purchase,  is  the  differ- 
ence between  the  price  it  paid  for  the  property  and  its  fair 
market  value  at  the  time.2 

If  the  promoter,  on  the  other  hand,  acquired  the  property  sold 
to  the  corporation  at  a  time  when  he  had  already  entered  upon 
the  relation  of  promoter  to  the  corporation,  he  was  bound,  on 
account  of  the  fiduciary  nature  of  that  relation,  to  make  the  pur- 
chase for  the  benefit  of  the  corporation.  The  corporation  is 
therefore  entitled  to  the  benefit  of  the  promoter's  purchase,  and 
may  recover  from  him  the  difference  between  the  price  that  he 
paid  for  the  property  and  the  sum  which  he  received  for  it.3 


89  N.  E.  193,  40  L.  R.  A.  N.  S.  314 ; 
same  v.  same,  188  Mass.  315,  321, 
74  N.  E.  653,  108  Am.  St.  Rep.  479 ; 
Parker  v.  Nickerson,  137  Mass.  487, 
497;  Bigelow  v.  Old  Dominion  Cop- 
per, etc.,  Co.,  74  N.  J.  Eq.  457,  504,  71 
Atl.  153;  In  re  Cape  Breton  Co.,  L. 
R.  29  Ch.  Div.  795,  805,  affirmed, 
sub.  nom.  Bentinck  v.  Fenn,  L.  R. 
12  App.  Gas.  652. 

See  also  cases  cited,  ante,  §  161. 

The  statement  in  the  case  first 
cited  that  the  company  is  entitled 
to  the  benefit  of  the  promoter's  pur- 
chase, if  he  purchased  the  property 
in  contemplation  of  its  organiza- 
tion, is  contrary  to  the  weight  of 
authority.  See  ante,  §  16. . 

As  to  the  measure  of  damages  in 
general  in  an  action  by  the  corpora- 
tion against  its  promoters,  see  note 
to  Lomita  Land  &  Water  Co.  v. 
Robinson,  18  L.  R.  A.  N.  S.  1131- 
1132. 

As    to    when    property    will    be 


deemed  to  have  been  acquired  by 
the  promoter  before  he  entered  upon 
the  fiduciary  relation,  and  when  it 
will  be  deemed  to  have  been  ac- 
quired thereafter,  see  ante,  §§  104- 
108,  15-18. 

2.  See  cases  cited  under  note  1, 
also  Hayden  v.  Green,  66  Kan.  204, 
71  Pac.  236,  and  Bentinck  v.  Fenn, 
L.  R.  12  App.  Gas.  652,  658-659. 

Cf.  In  re  Leeds  &  Hanley  Thea- 
tres of  Varieties,  1902,  2  Ch.  Div. 
809. 

If  the  property  is  fairly  worth 
the  price  paid  by  the  corporation, 
the  recovery  would  be  limited  to 
nominal  damages.  See  Bentinck  v. 
Fenn,  L.  R.  12  App.  Cas.  652,  659, 
661,  662,  aflirming,  In  re  Cape 
Breton  Co.,  L.  R.  29  Ch.  D.  795,  L. 
R.  26  Ch.  D.  221,  cited  in  Milwau- 
kee Cold  Storage  Co.  v.  Dexter,  99 
Wis.  214,  230,  74  N.  W.  976,  40 
L.  R.  A.  837,  842. 

3.  See  cases  cited  under  note  1; 


MEASURE  OF  RECOVERY.  483 

The  corporation  may  also  recover  the  difference  between  the 
price  paid  the  promoter  for  the  property  and  its  cost  to  him,  if 
the  promoter,  though  he  actually  acquired  the  property  before 
he  entered  upon  the  relation  of  promoter  to  the  corporation, 
represented  to  the  corporation,  or  to  its  subscribers,  that  he  acted 
for  it  in  making  the  original  purchase,  or  that  he  was  turning  the 
property  in  to  it  at  cost,  or  if  he  concealed  his  interest  in  the 
property  and  lead  the  company  to  believe  that  it  was  purchasing 
the  property  from  his  vendor.4 

An  action  for  the  difference  between  the  price  paid  for  the  prop- 
erty by  the  promoter,  and  the  amount  received  by  him  from  the 
corporation  is,  when  open  to  the  corporation,  generally  more 
satisfactory  and,  as  far  as  the  damage  is  concerned,  easier  of 
proof  5  than  an  action  for  fraud  and  deceit  for  the  recovery  of 
the  difference  between  the  price  paid  for  the  property  and  the 
fair  value  thereof.  The  form  of  action  first  mentioned  is,  there- 
fore, when  maintainable,  generally  preferred.  It  may,  however, 
happen  that  the  difference  between  the  price  paid  for  the  prop- 
erty by  the  corporation  and  the  fair  market  value  thereof  ex- 
ceeds the  promoter's  profit  on  the  resale,  and  there  seems  to  be 
no  reason  why  the  corporation  should  not,  although  the  pro- 
moter acquired  the  property  after  he  had  entered  upon  the  fidu- 
ciary relation,  be  allowed,  if  it  so  desires,  to  sue  the  promoter  for 
damages  for  fraud  and  deceit.6 

§  265.  In  action  for  accounting  for  profits. 

A  somewhat  complicated  situation  arose  in  Tyrrell  v.  Bank  of 
London.7  One,  Read,  having  obtained  a  contract  for  the  pur- 

also  Exter  v.  Sawyer,  146  Mo.  302,  fact    suffered   by   It,    but   also   the 

326,  47  S.  W.  951,  957.  amount  of  such  damage.     Bentlnck 

4.  See  ante,  §§  108,  162.  v.  Fenn,  L.  R.  12  App.  Cas.  652,  659, 

5.  The  burden  is  upon  the  cor-  667-668. 

poration      claiming      damages,      to          6.  See  ante,  §§  171,  161. 
prove,  not  only  that  damage  was  in         7.  10  H.   L.   Cas.   26,  45-48,   50, 

57-60,  11  Eng.  Rep.  934. 


484  THB  LAW  OF  PROMOTERS. 

chase  of  certain  real  estate,  entered  into  an  agreement  with  the 
appellant  Tyrrell,  who  was  acting  as  solicitor  for  the  respondent 
bank  then  in  process  of  organization,  that  Read  and  Tyrrell 
should  be  jointly  interested  in  the  former's  contract  of  purchase. 
Tyrrell  then,  as  solicitor  of  the  bank,  acting  under  the  instruc- 
tions of  its  board  of  directors  to  whom  he  did  not  disclose  his 
interest  in  the  transaction,  entered  into  ostensible  negotiations 
with  Read  which  resulted  in  the  sale  to  the  bank  for  the  sum  of 
£65,000  of  a  portion  of  the  property  in  which  Tyrrell  had  ob- 
tained a  half  interest.  It  was  claimed  that  Tyrrell's  share  of 
the  profits  of  the  transaction  amounted  to  £6,000  together  with  a 
half  interest  in  unsold  property  worth  £8,000.  The  master  of 
the  rolls  held  that  Tyrrell  was  a  trustee  for  his  client  of  all  the 
interest  acquired  by  him  in  the  property  and  that  the  respondent 
bank  was  entitled  to  the  clear  profit  that  Tyrrell  derived  from 
the  transaction.  The  House  of  Lords,  however,  held  that  Tyrrell 
was  a  trustee  for  his  client  of  only  that  particular  property  which 
it  afterward  purchased,  and  that  the  bank  was  entitled  to  re- 
cover from  Tyrrell  only  the  difference  between  what  it  paid  for 
his  share  of  the  property  and  the  cost  of  that  share  to  him.  The 
cost  to  Tyrrell  of  his  share  was,  however,  ascertained  by  deduct- 
ing from  the  sum  which  he  paid  for  his  interest  in  the  entire  prop- 
erty, the  value  of  his  share  of  that  part  of  the  property  which  was 
not  sold  to  the  bank  and  which  still  remained  in  his  and  Tyrrell's 
hands.  • 

§  266.  The    same    subject. — Allowance    as    compensation    for 

services. 

A  promoter  should,  on  an  accounting  for  his  secret  profits,  be 
allowed  credit  for  his  legitimate  expenses  on  the  promotion. 
Reasonable  compensation  for  the  promoter's  services  has  in  some 
cases  also  been  allowed,  but  the  better  rule  seems  to  be  that  a  pro- 
moter who  has  violated  the  obligations  of  his  fiduciary  relation 


MEASURE  OF  RECOVERY.  435 

by  committing  a  fraud  upon  the  corporation,  is  not  entitled  to 
compensation  for  services.8 

§  267.  Unlawful  commissions,  bribes,  etc. 

The  measure  of  the  corporation's  recovery  from  a  promoter 
who  improperly  accepts  a  commission,  bribe  or  gratuity  from  a 
person  selling  property  to  the  corporation  or  making  contracts 
with  it,  is  obviously  the  amount  of  the  unlawful  commission,  bribe 
or  gratuity  received  by  the  promoter.9  The  same  rule  applies  to 
a  promoter  who  unlawfully  takes  from  the  corporation  as  com- 
pensation for  his  services,  or  without  consideration,  any  moneys, 
securities  or  other  things  of  value.10 

§  268.  Measure  of  recovery  upon  rescission. 

The  measure  of  the  corporation's  recovery  in  case  of  the  re- 
scission of  a  purchase  made  by  it,  is,  generally  speaking,  the 
amount  of  the  purchase  price. 

It  was  claimed  in  Cortes  Co.  v.  Thannhauser  n  that  the  de- 
fendant vendors  should  also  be  held  liable  for  the  amount  of  the 
expenses  incurred  in  the  organization  of  the  corporation  and  in 
its  administration,  including  the  services  of  its  officers  and  agents 
— the  argument  being  that  these  expenses  were  the  direct  result 
of  the  fraud  committed  by  the  vendors'  agent.  The  court  held 
that  the  agency  was  merely  an  agency  to  sell  the  property,  and 
that  if  the  purchasers  chose  to  incur  unnecessary  expenses  with 
a  view  to  capitalizing  their  investment  and  managing  it  through 
the  instrumentality  of  a  corporate  organization,  that  was  not  the 
affair  of  the  defendants,  and  that  the  losses  incident  thereto  were 
not  the  direct  and  immediate  consequences  of  any  acts  of  the 

8.  See  ante,  §§  85,  164.  Bird,  L.  R.  33  Ch.  Div.  85,  24  Am. 

9.  Emery    v.    Parrott,   107    Mass.      &  Eng.  Corp.  Cas.  23. 

95;    Emma    Silver    Mining    Co.    v.  10.  Hay  ward  v.  Leeson.  176  Mass. 

Grant,  L.  R.  11  Ch.  Div.  918;  Me-  310,  57  N.  E.  656,  49  L.  R.  A.  725. 

Kay's'  Case,   L.    R.   2   Ch.    Div.   1;  11.  45  Fed.  Rep.  730,  739-740. 
Lydney  &  Wigpool  Iron  Ore  Co.  v. 


486  THE  LAW  OF  PROMOTERS. 

agent  for  which  the  vendors  were  accountable.  It  appears  from 
the  reasoning  of  the  court  that  a  different  conclusion  might  have 
been  reached  had  the  defendant  vendors  themselves  promoted  the 
plaintiff  corporation. 

§  269.  Measure  of  damages  in  case  of  false  representations. 

The  measure  of  the  corporation's  damages  in  case  the  promoter 
by  false  representations  induces  it  to  purchase  his  own  property, 
is  not  the  same  in  all  jurisdictions.  It  is  held  in  some  jurisdic- 
tions that  the  measure  of  damages  is,  just  as  in  an  action  upon  a 
warranty,  the  difference  between  the  value  of  the  property  as  it 
was  in  fact,  and  its  value  as  it  would  have  been  had  the  repre- 
sentations been  true.12  Other  jurisdictions  fix  the  measure  of 
damages  at  the  difference  between  the  price  which  the  corpora- 
tion paid  for  the  property  and  the  actual  value  thereof.13  • 

The  measure  of  damages  may  also  vary  according  to  the  par- 
ticular nature  of  the  misrepresentation  complained  of. 

In  Gluckstein  v.  Barnes,14  the  promoters,  while  admitting  that 
they  were  deriving  a  profit  upon  the  resale  of  certain  property  to 
the  corporation,  understated  the  amount  of  this  profit.  The 

12.  Old    Dominion    Copper,    etc.,  135   Fed.    Rep.    449,   459,    68   C.    C. 
Co.  v.  Bigelow,  188  Mass.  315,  320-  A.    161,    affirming,    126    Fed.    Rep. 
321,  74  N.  E.  653,  108  Am.  St.  Rep.  968.     Petition  for  writ  of  certiorari 
479 ;  Lagunas  Nitrate  Co.  v.  Lagunas  denied,  197  U.   S.  623,  25  Sup.  Ct. 
Syndicate,    1899,    2    Ch.    Div.    392 ;  800,  49  L.  Ed.  911. 

Burrowes  v.  Lock,  10  Ves.  Jr.  470,  See  also  ante,  §  102,  note  53,  and 

475,  and  cases  cited ;  Peek  v.  Gurney,  post,  §  277. 

L.  R.  6  H.  L.  377,  390;  Alexandra  14.  1900,  App.  Cas.  240,  affirming, 

Oil  &  Development  Co.  v.  Cook,  10  In  re  Olympia,  Ltd.,  1898,  2  Ch.  Div. 

Ont.  W.  R.  781,  affirmed,  11  Ont.  W.  153 ;  ,see  Old  Dominion  Copper,  etc., 

R.  1054,  and  see  post,  §  277.  Co.  v.  Bigelow,  188  Mass.  315,  320- 

13.  Sigafus  v.   Porter,   179  U.    S.  321,  74  N.  E.  653,  108  Am.  St.  Rep. 
116,  21  Sup.  Ct.  34,  45  L.  Ed.  113,  479 ;    Kilgore    v.    Bruce,  .166    Mass, 
reversing,   84   Fed.   Rep.  430,  28  C.  136,  44  N.  E.  108;  Alexandra  Oil  & 
C.  A.  443,  51  U.  S.  App.  693;  Strat-  Development  Co.    v.    Cook,    10  Ont. 
tons   Independence,   Ltd.,   v.   Dines,  W.  R.  781,  affirmed,  11  Ont.  W.  R. 

1054. 


MEASURE  OF  RECOVERY.  437 

measure  of  their  liability  was  held  to  be  the  difference  between  the 
price  which  they  represented  that  they  had  paid  for  the  property, 
and  its  actual  cost  to  them. 

In  Economy  Powder  Co.  v.  Boyer,15  a  promoter  who  had  ob- 
tained subscriptions  by  falsely  stating  that  he  was  receiving 
his  shares  at  the  same  price  as  the  other  subscribers,  was,  in  an 
action  by  the  corporation,  compelled  to  pay  the  difference  be- 
tween the  price  he  had  paid  for  his  shares,  and  the  price  which 
he  represented  that  he  was  paying  therefor. 

In  O'Sullivan  v.  Clarkson,16  promoters  who  had  represented 
that  the  liabilities  of  one  of  the  constituent  companies  taken  over 
by  the  new  corporation  did  not  exceed  a  sum  named,  were  com- 
pelled to  indemnify  the  consolidated  company  against  the  pay- 
ment of  any  debts  of  the  constituent  company  in  excess  of  the 
sum,  so  stated. 

§  270.  Measure  of  value  of  shares. 

It  often  becomes  necessary,  in  fixing  the  amount  of  the  pro- 
moter's liability,  to  determine  the  value  of  shares  taken  by  him. 
It  frequently  happens  that  these  shares  are  so  taken  before  the 
corporation  has  acquired  any  property,  and  before  the  shares 
can  be  said  to  have  any  value.  The  date  at  which  the  value  of 
the  shares  is  to  be  fixed  must,  in  such  case,  be  carried  forward  to 
a  time  when  the  corporation  has  been  fully  organized  and  the 
value  of  its  shares  in  some  measure  fixed.17  Some  cases  hold  that 
the  corporation  may  recover  the  highest  value  of  the  shares  at 
any  time  while  they  are  owned  by  the  promoter.18 

15.  2  Berks  (Pa.)  131.    But  com-  18.  Eden    v.    Ridsdales    Railway 
pare  §  215,  ante.  Lamp  &  Lighting  Co.,  L.  R.  23  Q. 

16.  9  Out.  W.  R.  46.  B.  Div.  368;  Nant-Y-Glo  &  Blaina 

17.  Hayward  v.  Leeson,  176  Mass.  Ironworks  Co.   v.   Grave,   L.   R.   12 
310,  322-323,  57  N.  E.  656,  49  L.  R.  Ch.  Div.  738;  McKay's  Case,  L.  R. 
A.  725;  East  Tennessee  Land  Co.  v.  2  Ch.  Div.  1. 

Leeson,  183  Mass.  37,  66  N.  E.  427.  Cf.  Shaw  v.  Holland,  1900,  2  Ch. 

Div.  305. 


488 


THE  LAW  OF  PROMOTERS. 


The  value  of  the  shares  taken  by  the  promoter  may  be  proved 
by  the  price  at  which  other  shares  were  allotted  to  subscribers,1* 
or  by  the  price  at  which  shares  were  afterwards  sold  in  the  open 
market.20  The  fact  that  a  small  number  of  shares  were  sold  at 
a  certain  price  does  not,  however,  necessarily  prove  that  a  large 
number  of  shares  could  have  been  disposed  of  at  the  same  price.21 
The  promoter  will  not  ordinarily  be  held  liable  for  the  par  value 
of  the  shares  in  the  absence  of  some  evidence  fixing  that  sum  as 
their  value.22 

The  promoter  may,  in  case  of  the  insolvency  of  the*  corpora- 
tion, become  liable  to  the  creditors  for  the  par  value  of  the  shares 
issued  to  him  without  consideration.23  If  the  shares  were  prop- 


19.  Chandler   v.    Bacon,    30   Fed. 
Rep.  538,  540;  London  Trust  Co.  v. 
Mackenzie,  62  L.  J.  Ch.  9.   S.  870, 
877;    Weston's   Case,   L.   R.   10  Ch. 
Div.  579;  Mitcalfe's  Case,  L.  R.  13 
Ch.  Div.  169.     See  also  cases  cited 
under  note  22,  infra. 

20.  See  cases  cited  under  note  18, 
supra,  and  see  Bigelow  v.  Old  Do- 
minion  Copper,   etc.,   Co.,   74  N.   J. 
Eq.  457,  499,  71  Atl.  153. 

21.  Shaw  v.  Holland,  1900,  2  Ch. 
Div.  305. 

22.  St.  Louis  F.   S.  &  W.  R.  Co. 
v.  Tiernan,  37  Kan.  606,  635,  15  Pac. 
544,  560;  Arnold  v.  Searing,  78  N. 
J.   Eq.    146,   163,   78   Atl.   762,   769; 
Carling's    Case,    L.    R.    1    Ch.    Div. 
115,  126-127;  McKay's  Case,  L.  R. 
2  Ch.  Div.  1,  6,  8,  and  see  ante,  § 
165. 

For  cases  in  which  there  was  evi- 
dence that  the  shares  were  worth 
par,  see  Bigelow  v.  Old  Dominion 
Copper,  etc.,  Co.,  74  N.  J.  Eq.  457, 
499,  71  Atl.  153;  Wills  v.  Nehalem 
Coal  Co.,  52  Or.  70,  96  Pac.  528; 


First  Avenue  Land  Co.  v.  Hilde- 
brand,  103  Wis.  530,  536-537,  79  N. 
W.  753;  Jenkins  v.  Bradley,  104 
Wis.  540,  80  N.  W.  1025;  Franey  v. 
Warner,  96  Wis.  222,  237,  71  N.  W. 
81,  86;  McKay's  Case,  L.  R.  2  Ch. 
Div.  1,  6,  8,  (followed  in  Phosphate 
Sewage  Co.  v.  Hartmont,  L.  R.  5 
Ch.  Div.  394,  442,  447,  46  L.  J. 
Ch.  661)  ;  In  re  Carriage  Co-opera- 
tive Supply  Assoc.,  L.  R.  27  Ch. 
Div.  322,  332;  De  Ruvigne's  Case, 
L.  R.  5  Ch.  Div.  306;  Ormerod's 
Case,  37  L.  T.  N.  S.  244,  25  W.  R. 
765;  Pearson's  Case,  L.  R.  5  Ch. 
Div.  336;  341,  affirming,  L.  R.  4  Ch. 
Div.  222,  and  see  ante,  §  165. 

23.  Bigelow  v.  Old  Dominion 
Copper,  etc.,  Co.,  74  N.  J.  Eq.  457, 
503,  71  Atl.  153;  See  v.  Heppen- 
heimer,  69  N.  J.  Eq.  36,  73,  78, 
61  Atl.  843 ;  same  case  on  demurrer, 

55  N.   J.   Eq.   240,  36  Atl.   966,  af- 
firmed, sub  nom.  Naumberg  v.  See, 

56  N.    J.    Eq.    453,    41    Atl.    1116; 
Arnold  v.  Searing,  78  N.  J.  Eq.  146, 
163,  78  Atl.  762,  769. 


MEASURE  OF  RECOVERY.  4g9 

«rly  issued  as  full  paid  in  payment  of  property,  and  the  vendor 
of  the  property  improperly  transfers  some  of  these  shares  to  the 
promoters,  the  promoters  may  be  made  to  account  to  the  corpo- 
ration for  the  shares  received  by  them,  but  they  are  not  liable  to 
the  creditors  for  the  par  value  thereof.24 

In  Bentinck  v.  Fenn,25  certain  mining  property  was  sold  to  the 
company  for  £12,000  in  cash  and  £30,000  in  shares.  Lord 
MacNaghten  took  the  price  paid  for  the  property  as  £12,000, 
leaving  out  of  consideration  the  portion  of  the  purchase  price 
paid  in  shares  "  which  represented  the  profit  to  be  gained  either 
from  working  the  coalfield  or  from  the  credulity  of  the  public." 
It  does  not  appear  whether  the  other  judges  concurred  in  this 
statement.  It  appears  from  the  report  of  the  case  in  the  Chan- 
cery Division  that  the  shares  were  at  or  about  the  time  of  the 
organization  of  the  company  salable  at  a  substantial  price.26 

In  Arnold  v.  Searing,27  the  promoters  had  unlawfully  taken  a 
large  profit  in  the  bonds  and  shares  of  the  corporation.  All  the 
shares  of  the  corporation  had  been  issued  either  to  the  pro- 
moters, or  as  a  bonus  to  the  bona  fide  purchasers  of  bonds.  The 
vice-chancellor  concluded  that  this  fact  indicated  that  the  share- 
holders considered  the  stock  to  have  no  actual  value,  and  that 
the  promoters  should  not  be  made  to  account  for  any  of  the 

McAllister   v.   American   Hospital  (1857),   7   Ir.   Ch.   Rep.   N.   S.   256, 

Assn.,  62  Or.  530,  125  Pac.  286.  where   both   the   directors   and   the 

In  re  Hess  Manufacturing  Co.,  23  vendor   were   held   liable   upon   the 

Can.  S.  C.  644,  659-660;  In  re  Car-  shares  given  by  the  vendor  to  the 

riage  Co-operative  Supply  Assoc.,  L.  directors. 

R.  27  Ch.  Div.  322.  25.  L.   R.  12  App.  Cas.  652,  671, 

See  ante,  §  165.  affirming,   In   re  Cape   Breton   Co., 

24.  Carling's   Case,   L.    R.   1   Ch.  L.  R.  29  Ch.  Div.  795,  affirming,  L. 

Div.  115;  In  re  Innes  &  Co.,  Ltd.,  R.  26  Ch.  Div.  221. 

1903,  2  Ch.  Div.  254 ;  In  re  Howat-  26.  See  L.  R.  26  Ch.  Div.  221. 

son    Patent   Furnace   Co.,   4   Times  27.  78  N.  J.  Eq.  146,  163-164,  78 

Law  Rep.  152,  and  see  ante,  §§  100,  Atl.  762.  769;  cf.  Bentinck  v.  Fenn, 

165,  110.  L.  R.  12  App.  Cas.  652,  667. 

See,  however,   Ex   parte  Perrier, 


490  THE  LAW  OF  PROMOTERS. 

"  stock  profits  "  taken  by  them.28  It  is  suggested  that  it  should,, 
in  the  absence  of  evidence  to  the  contrary,  be  assumed  that  the 
shares  of  the  company  have  at  least  some  value.29 

§  271.  Measure  of  value  of  bonds. 

While  it  frequently  happens  that  bonds  of  the  corporation  are 
taken  by  the  promoters  without  consideration,  as  compensation 
for  services,  or  in  payment  for  property,  under  such  circum- 
stances as  to  render  them  liable  to  the  corporation,  questions 
relating  to  the  proper  measure  of  the  value  of  such  *bonds  do  not 
seem  to  have  been  passed  upon  by  the  courts.30  It  might  well  be 
argued  that  as  a  bond  represents  an  obligation  of  the  corporation 
for  the  face  thereof  which  the  corporation,  presumably,  will  have 
to  pay,  the  promoters  should  be  charged  with  the  face  value  of 
the  bond.  It  would,  however,  in  most  cases,  more  nearly  meet  the 
ends  of  justice  to  charge  the  promoters  with  the  fair  market 
value  of  the  bonds  at  the  time  of  the  taking,  and  if  the  bonds 
have  no  market  value,  then  with  their  actual  value.  This  is  pre- 
sumed, in  the  absence  of  evidence  to  the  contrary,  to  be  the  face 
value  of  the  bonds.31 

§  272.  Value  of  property  sold  to  the  corporation. 

It  is  frequently,  in  order  to  determine  the  extent  of  the  pro- 
moters' liability  because  of  an  unlawful  sale  of  their  property  to 
the  corporation,  necessary  to  fix  the  value  of  the  property  so 
sold  to  the  corporation.  The  value  of  the  property  is  generally 
to  be  taken  as  of  the  time  of  its  conveyance.32 

28.  This  decision  is  discussed  in         31.  Henry     v.     North     American 
§  165,  ante.  Ry.   Const.   Co.,   158  Fed.   Rep.   79, 

29.  See    In    re    The    Howatson      80,  85  C.  C.  A.  409. 

Patent  Furnace  Co.,  4  Times   Law  32.  See,  though  hardly  in  point, 

Rep.    152.     And    see   ante,    §§    133,  the  interesting  case  of   Jenkins   v. 

165.  Bradley,  104  Wis.  540,  558,  et  seq. 

30.  See  perhaps  Arnold  v.   Sear-  80  N.  W.  1025,  1031,  et  seq.,  where 
ing,  78  N.  J.  Eq.  146,  164,  78  Atl.  the  promoters  were  held  liable  on 
762.  the  ground  that  the  title  conveyed 


MEASURE  OF  RECOVERY.  491 

§  273.  The  same  subject.— Market  value  the  standard. 

In  Old  Dominion  Copper,  etc.,  Co.  v.  Bigelow,83  the  promoters 
after  acquiring  at  a  cost  of  about  $1,000,000  the  entire  capital 
stock  of  an  existing  corporation  had,  by  skillful  manipulation, 
increased  the  market  value  thereof  to  $2,000,000,  and  then  sold 
such  stock  to  the  plaintiff  corporation  for  an  even  larger  sum. 
It  was  contended  on  behalf  of  the  plaintiff  corporation  that  the 
promoters  should,  for  the  purpose  of  estimating  the  damages, 
be  credited  with  only  the  intrinsic  value,  and  not  with  the  market 
value  of  the  shares.  The  court,  however,  held  that,  market  value 
is,  when  ascertainable,  the  standard  to  be  applied,  and  that  the 
promoters  should  be  credited  with  the  market  value  of  the  shares 
of  the  old  company  though  established  by  their  manipulations. 

§  274.  The  same  subject. — Proof  of  value. 

It  has  at  times  been  claimed  that  the  value  of  property  con- 
veyed to  the  corporation  by  its  promoters  may  be  established  by 
the  price  at  which  the  shares  of  the  corporation  were  subsequently 
sold  in  the  market.  This  contention  was  overruled  in  Bigelow  v. 
Old  Dominion  Copper,  etc.,  Co.,34  Chancellor  Pitney  35  saying, 
"  Common  experience  tells  us  that  the  sale  value  of  corporate 
shares  in  the  market  has  only  an  indirect  and  sometimes  a  re- 
mote relation  to  the  fair  market  value  of  the  property  that  forms 
the  assets  of  the  corporation.  It  is  easy  to  see,  for  instance,  how 
when  men  of  standing  in  the  financial  world  promote  a  company, 
make  over  to  it  mining  properties,  and  cause  the  shares  to  be 
placed  upon  the  market,  the  confidence  of  purchasers  of  the  shares 

by  them  was  in  part  defective.    The  193,  40  L.  R.  A.  N.  S.  314.     See  the 

damages  were  fixed  at  the  difference  query  in  Bigelow  v.  Old  Dominion 

between    the    actual    value    of    the  Copper,  etc.,  Co.,  74  N.  J.  Eq.  457, 

property  and  the  value  of  the  title  504,    71    Atl.    153;   cf.   Twycross   v. 

conveyed  by  the  promoters,  and  not  Grant,  L.  R.  2  C.  P.  D.  460,  480. 

at  the  far  larger  sum  which  it  had  34.  74  N.  J.  Eq.  457,  499-500,  71 

cost  the  corporation  to  buy  in  the  Atl.  153,  171. 

outstanding  interest  at  a  later  time.  35.  Now  Associate  Justice  of  the 

33.  203  Mass.  159,  202,  89  N.  E.  Supreme  Court  of  the  United  States. 


492  THE  LAW  OF  PROMOTERS. 

in  the  standing  and  good  faith  of  the  promoters  may  enter  largely 
into  the  competition  for  the  shares,  and  thus  affect  their  market 
value.  Such  purchasers  may  reasonably  believe  that  the  prop- 
erty was  sold  to  the  company  by  the  promoters  at  a  fair  and 
open  price." 

The  price  at  which  property  is  purchased  by  the  promoter 
shortly  before  its  sale  to  the  corporation,  has  a  material  bearing 
upon  the  question  of  its  value  at  the  time  of  the  resale.  In  Re 
Leeds  &  Hanley  Theatres  of  Varieties,36  the  promoter  had  shortly 
before  the  sale  to  the  corporation  purchased  the  property  in 
question  at  £24,000,  and  this  property  was  sold  a  year  or  two 
later  at  £19,000.  It  was  held  that  these  circumstances  proved 
that  the  property  was  not,  at  the  time  of  its  sale  to  the  corpora- 
tion, worth  the  £75,000  paid  for  it,  or  even  the  £64,000  and  odd, 
remaining  to  the  promoter  as  the  net  proceeds  of  the  sale  after  de- 
ducting the  moneys  expended  partly  in  promotion  expenses  and 
partly  in  improving  the  property;  and  that  the  damages  suffered 
by  the  corporation  were  sufficiently  proved  to  have  amounted  to 
at  least  the  £12,000  allowed  by  the  trial  court. 

It  was  held  in  Bentinck  v.  Fenn  37  that  the  fact  that  a  certain 
coal  property  was  purchased  for  £5,500  in  1871  did  not  neces- 
sarily prove  that  a  price  of  £42,000  paid  £12,000  in  cash,  and 
£30,000  in  shares  (the  £30,000  paid  in  shares  was  apparently  dis- 
regarded,38) was  excessive  in  1873,  it  appearing  that  it  was  a 
matter  of  common  knowledge  that  there  had  been  a  very  sub- 
stantial rise  in  the  value  of  coal  properties  during  that  period, 
and  there  being  other  evidence  to  indicate  that  the  price  paid  by 
the  corporation  was  not  unreasonable. 

§  275.  Measure  of  value  of  property  paid  for  by  subsequent 

issue  of  mortgage  bonds. 
In  Montgomery  Iron  Works  v.  Roman,39  the  promoters  having 

36.  1902,  2  Ch.  Div.  809,  826,  830.          38.  See  p.  671. 

37.  L.  R.  12  App.  Gas.  652,  659-          39.  147  Ala.  434,  41  So.  811. 
€60. 


MEASURE  OF  RECOVERY.  493 

subscribed  for  $50,000  par  value  of  stock,  conveyed  in  payment 
of  their  subscriptions  and  in  payment  for  $30,000  of  bonds, 
property  worth  not  more  than  $50,000.  The  bonds  were,  how- 
ever, not  issued  until  a  later  time.  The  corporation  having  be- 
come insolvent,  the  creditors  brought  suit  against  the  promoters 
upon  the  theory  that  their  stock  subscriptions  had  not  been  fully 
paid.  The  promoters  contended  that  the  gross  value  of  the  prop- 
erty should  be  taken  as  received  by  the  corporation  in  payment 
for  the  shares.  This  contention  was  overruled  on  the  ground  that 
the  bonds,  though  not  issued  until  a  later  time,  were  issued  by  the 
corporation  and  received  by  the  promoters  as  a  part  of  the  or- 
iginal transaction,  and  as  the  bonds  were  secured  by  a  trust  mort- 
gage on  the  property  conveyed,  the  promoters  should  be  credited, 
as  against  the  shares  received  by  them,  with  the  difference  be- 
tween the  value  of  the  property  and  the  amount  of  the  mortgage 
bonds. 

§  276.  Measure  of  recovery  in  minority  stockholders'  suits. 

The  measure  of  the  recovery  in  a  minority  stockholders'  suit  is 
ordinarily  the  same  as  though  the  suit  were  brought  by  the  corpo- 
ration itself.  Situations,  however,  arise  from  time  to  time  which 
make  the  application  of  a  different  rule  of  recovery  necessary. 

In  Spaulding  v.  North  Milwaukee  Town  Site  Co.,40  it  appeared 
that  all  the  stockholders,  except  the  plaintiffs  and  the  holders  of 
twelve  other  shares,  had  "  released  any  claim  or  right  to  be  reim- 
bursed for  their  share  of  the  moneys  obtained  by  defendants 
from  the  corporation."  The  court  said  that  if  the  case  before  it 
were  an  action  at  law  by  the  corporation,  there  might  be  no  es- 
cape from  the  entry  of  a  money  judgment  for  the  full  amount,41 
but  as  the  action  was  in  equity  and  the  corporation  had  been  dis- 

40.  106  Wis.  481,  495,  et  seq.,  81  poration,    see    Hyde    Park    Terrace 
N.  W.  1064,  1069.  Co.  v.  Jackson  Bros.  R'lty  Co.,  161 

41.  As  to  the  powers  of  a  court  N.  Y.  App.  Div.  699,  146  Supp.  1037. 
of  equity  in  an  action  by  the  cor- 


494  THE  LAW  OF  PROMOTERS. 

solved  and  had  no  use  for  the  money  except  for  distribution  among 
its  stockholders',  the  court  would  not  compel  the  defendants  to 
pay  over  to  the  corporation  moneys  which  as  their  trustee  it  must 
return  to  them,  either  in  their  own  right  as  stockholders  or  in 
the  right  of  others  who  by  settlement  had  released  their  claims. 
After  referring  to  Jenkins  v.  Bradley,42  the  court  concluded  that 
the  defendants  should  be  made  to  pay  to  the  plaintiffs,  and  to  the 
unknown  holders  of  the  twelve  shares,  only  such  part  of  their 
liability  to  the  corporation  as  was  represented  by  the  shares  of 
the  non-releasing  stockholders.  As  the  names  of  the  holders  of 
the  twelve  shares  were  not  disclosed  and  no  judgment  could  be 
rendered  in  their  favor,  and  as  both  plaintiffs  were  indebted  to 
the  corporation  for  assessments  on  their  stock,  the  court  con- 
cluded that  the  rights  of  all  parties  would  best  be  served  by  or- 
dering a  recovery  in  the  name  of  the  corporation  as  trustee  for 
the  two  plaintiffs  and  the  unknown  holders  of  the  twelve  shares, 
the  money  so  recovered  to  be  applied  to  these  beneficiaries  by 
crediting  the  same  upon  the  assessments  on  their  shares,  or  pay- 
ing it  over  to  them  as  their  rights  might  be  determined. 

In  Jenkins  v.  Bradley,43  the  plaintiffs  suing  as  minority  stock- 
holders had,  during  the  progress  of  the  litigation,  made  a  settle- 
ment with  some  of  the  defendants  upon  the  payment  by  these 
defendants  of  a  sum  supposed  to  represent  their  proportion  of 
the  moneys  which  would  go  to  the  plaintiffs  in  the  event  of  a  re- 
covery from  all  of  the  defendants.  The  trial  court  required  the 
remaining  defendants  to  pay  to  the  corporation  the  entire  dam- 
ages claimed  on  its  behalf.  The  appellate  court,  however,  said 
that  this  looked  like  throwing  a  much  greater  obligation  upon 
the  men  who  did  not  settle  than  equity  would  permit ;  that  if  the 
plaintiffs  had  a  right,  pending  the  suit,  to  settle  with  some  of 
the  defendants,  a  cause  of  action  in  favor  of  the  corporation  and 

42.  See  next  note.  43.  104    Wis.     540,    557-558,    80 

N.  W.  1025,   1030-1031. 


MEASURE  OF  RECOVERY. 


495 


io  accept  the  fruits  of  such  settlement  for  themselves,  it  would 
have  been  more  exact  justice,  all  the  parties  being  before  the 
court,  to  have  required  the  defendants  to  pay  such  sum  as  would 
make  the  plaintiffs  whole,  instead  of  the  larger  sum  which  would 
go  to  the  credit  of  all  the  shares  alike. 

§  277.  Measure  of  damages  in  action  for  fraud  in  sale  of  shares. 
The  measure  of  damages  in  an  action  for  fraudulent  repre- 
sentations upon  a  sale  of  shares  is,  in  some,  jurisdictions,  the  same 
as  the  measure  of  damages  in  an  action  upon  a  warranty ;  that  is 
the  difference  between  the  value  of  the  shares  as  they  were  and 
their  value  as  it  would  have  been  had  the  representations  com- 
plained of  been  true.44  The  rule  prevailing  in  other  jurisdictions 


44.  Arkansas. — Matlock  v.  Reppy, 
47  Ark.  148,  14  S.  W.  546. 

California. — Neher  v.  Hansen,  12 
Cal.  App.  370,  107  Pac.  565. 

Florida. — Williams  v.  McFadden, 
23  Fla.  143,  1  So.  618,  11  Am.  St. 
Rep.  345. 

Illinois.— Drew  v.  Beall,  62  III 
164;  Home  v.  Walton,  117  III  130, 
7  N.  E.  100. 

Indiana. — Nysewander  v.  Low- 
man,  124  Ind.  584,  24  N.  E.  355. 

Kentucky. — Exchange  Bank  of 
Kentucky  v.  Gaitskill,  18  Ky.  L.  R. 
532,  37  S.  W.  160. 

Massachusetts. — Whiting  v.  Price, 
172  Mass.  240,  51  N.  E.  1084,  70 
Am.  St.  Rep.  262,  cited  in  Honsucle 
v.  Ruffin,  172  Mass.  420,  52  N.  E. 
538;  Kilgore  v.  Bruce,  166  Mass. 
136,  139,  44  N.  E.  108;  Ginn  v. 
Almy,  212  Mass.  486,  502,  99  N.  E. 
276. 

Michigan.— Page  v.  Wells,  37 
Mich.  415. 

Nebraska. — Woolman     v.     Wirts- 


baugh,  22  Neb.  490,  35  N.  W.  216. 

New  Hampshire. — Page  v.  Parker, 
43  N.  H.  363,  80  Am.  Dec.  172. 

New  York. — Vail  v.  Reynolds,  118 
N.  Y.  297,  301,  23  N.  E.  301,  (citing 
Krumm  v.  Beach,  96  N.  Y.  398,  406 ; 
and  Whitney  v.  Allaire,  1  N.  Y. 
305,  312)  ;  Miller  v.  Barber,  66  N. 
Y.  558,  568;  Spotten  v.  De  Freest, 
140  App.  Div.  792,  125  Supp.  497; 
Parsons  v.  Johnson,  28  App.  Div.  1, 
50  Supp.  780;  Clarke  v.  Mercantile 
Trust  Co.,  110  App.  Div.  901,  903, 
95  Supp.  1118,  (dissenting  opinion)  ; 
Hubbell  v.  Melgs,  50  N.  Y.  480;  cf. 
Getty  v.  Devlin,  54  N.  Y.  403,  415. 

North  Carolina. — Lunn  v.  Sher- 
mer,  93  N.  C.  164. 

North  Dakota. — Beare  v.  Wright, 
14  N.  D.  26,  103  N.  W.  632,  69  L. 
R.  A.  409,  8  Am.  &  Eug.  Ann.  Cas. 
1057;  Fargo  Gas  &  Coke  Co.  v. 
Fargo  Gas  &  Electric  Co.,  4  N.  D. 
219,  226,  59  N.  W.  1066,  37  L.  R.  A. 
593,  615. 


496. 


THE  LAW  OF  PROMOTERS. 


is  that  the  measure  of  damages  in  an  action  for  fraud  and  deceit 
upon  the  sale  of  shares  is,  just  as  the  measure  of  damages  in  other 
actions  of  fraud,  the  injury  done  to  the  plaintiff  by  the  fraudu- 
lent representations — that  is  in  the  case  of  a  fraudulent  sale  of 
shares,  the  difference  between  the  price  the  plaintiff  paid  for 
his  shares,  and  their  actual  value  at  the  time  of  the  purchase.45 


Vermont. — Woodward  v.  Thacher, 
21  Vt.  580,  52  Am.  Dec.  73. 

Wisconsin. — Warner  v.  Benjamin, 
89  Wis.  290,  62  N.  W.  179. 

See  also  Sedgwick  on  Damages, 
(9th  ed.),  §§  777,  et  seq.;  Suther- 
land on  Damages,  (3rd  ed.),  §§ 
1171-1172. 

It  has  been  said  that  if  a  pro- 
moter invites  others  to  join  with 
him  in  the  purchase  of  property  at 
a  given  price,  falsely  representing 
that  all  are  to  share  equally  in  the 
cost  and  equally  in  the  benefits  of 
the  enterprise,  and  the  promoter 
in  fact  acquires  secretly  a  profit  to 
himself,  he  commits  a  fraud  upon 
the  innocent  subscribers,  and  they 
may  sue  him  for  damages  for  the 
fraud  to  the  extent  of  the  enhanced 
value  they  were  made  to  pay  by 
reason  thereof.  See  Franey  v.  War- 
ner, 96  Wis.  222,  235,  71  N.  W.  81, 
85;  Hebgen  v.  Koeffler,  97  Wis.  313, 
320,  72  N.  W.  745,  747-748;  Beatty 
v.  Neelon,  13  Can.  S.  C.  1,  19  Am.  & 
Eng.  Corp.  Gas.  236.  See  note  of 
Freeman,  J.,  to  Pittsburg  Mining 
Co.  v.  Spooner,  17  Am.  St.  Rep.  149, 
167-168. 

It  has  also  been  held  that  where 
the  plaintiff's  subscription  is  in- 
duced by  a  false  representation  that 
another  subscriber  is  paying  the 
same  price  as  the  plaintiff,  the 


plaintiff  may  recover  the  difference 
between  the  subscription  price  paid 
by  him  and  the  price  paid  by  the 
other  subscriber.  Kilgore  v.  Bruce, 
166  Mass.  136,  44  N.  E.  108. 

45.  Federal. — Smith  v.  Bolles,  132 
U.  S.  125,  32  L.  Ed.  279,  10  Sup. 
Ct.  39;  Sigafus  v.  Porter,  179  U.  S. 
116,  21  Sup.  Ct.  34,  45  L.  Ed.  113, 
and  cases  cited;  Hindman  v.  First 
Nat'l  Bk.,  112  Fed.  Rep.  931,  50  C. 
C.  A.  623,  57  L.  R.  A.  108;  Strat- 
ton's  Independence,  Ltd.,  v.  Dines, 
135  Fed.  Rep.  449,  459,  68  C.  C.  A. 
161,  affirming,  126  Fed.  Rep.  968. 
Petition  for  writ  of  certiorari  de- 
nied, 197  U.  S.  623,  25  Sup.  Ct.  800, 
49  L.  Ed.  911;  Rockefeller  v.  Mer- 
ritt,  76  Fed.  Rep.  909,  22  C.  C.  A. 
608,  40  U.  S.  App.  666,  35  L.  R.  A. 
633;  cf.  Chesbrough  v.  Woodworth, 
195  Fed.  Rep.  875,  885,  116  C.  C.  A. 
465. 

Maryland. — Buschman  v.  Codd,  52 
Md.  202. 

Minnesota. — Redding  v.  Godwin, 
44  Minn.  355,  46  N.  W.  563;  Alden 
v.  Wright,  47  Minn.  225,  49  N.  W. 
767 ;  Reynolds  v.  Franklin,  44  Minn. 
30,  46  N.  W.  139,  20  Am.  St.  Rep. 
540;  Stickney  v.  Jordan,  47  Minn. 
262,  49  N.  W.  980;  cf.  Doran  v. 
Eaton,  40  Minn.  35,  41  N.  W.  244. 

New  Jersey. — Crater  v.  Binninger, 
33  N.  J.  L.  513,  97  Am.  Dec.  737; 


MEASURE  OF  RECOVERY. 


497 


The  rule  last  mentioned  is,  certainly  in  an  action  for  damages 
for  the  fraud  of  a  promoter  in  the  sale  of  the  company's  shares, 
greatly  to  be  preferred.  The  rule  of  damages  first  mentioned 
would,  in  many  cases,  prove  wholly  inadequate.  It  may  often 
happen  that  the  shares  purchased  by  the  plaintiff  would,  even 
though  the  facts  represented  by.  the  promoter  had  been  true, 
still  have  been  worthless,  and  the  plaintiff  could  under  the  rule 
first  stated  recover  only  nominal  damages.  It  may  be  urged  that 
the  plaintiff  has,  in  such  case,  suffered  no  injury.  This  is,  how- 
ever, not  so,  for  it  may  well  be  that  the  plaintiff,  had  he  known 
the  facts,  would  not  have  purchased  the  shares,  and  that  the 
entire  loss  sustained  by  him  because  of  his  unfortunate  invest- 
ment is,  therefore,  the  direct  result  of  the  defendant's  misrepre- 
sentation. Again  if  the  misrepresentation  complained  of  is  a 
statement  that  the  promoter  is  making  no  profit  from  the  trans- 


Duffy  v.  McKenna,  82  N.  J.  L.  62, 
67,  81  Atl.  1101. 

Pennsylvania. — High  v.  Berret, 
148  Pa.  261,  23  Atl.  1004. 

United  Kingdom  and  Colonies. — 
Twycross  v.  Grant,  L.  R.  2  C.  P.  D. 
469,  489-491,  503-505,  542-543, 
(evidently  approved  in  Capel  &  Co. 
v.  Sim's  Ships  Composition  Co.,  57 
L.  J.  Ch.  N.  S.  713) ;  Peek  v.  Derry, 
L.  R.  37  Ch.  Div.  541,  578,  591-594, 
(reversed  on  another  point,  sub 
nom.  Derry  v.  Peek,  L.  R.  14  App. 
Cas.  337),  followed  in  Exploring 
Land  &  Minerals  Co.,  Ltd.,  v.  Kolck- 
mann,  94  L.  T.  N.  S.  234;  Davidson 
v.  Tulloch,  3  Macq.  783,  790,  794,  2 
L.  T.  N.  S.  97;  Arkwright  v.  New- 
bold,  L.  R.  17  Ch.  Div.  301,  312,  re- 
versed  on  another  point,  see  page 
316,  et  seq.;  Arnison  v.  Smith,  L.  R. 
41  Ch.  Div.  348,  363;  Broome  v. 
Speak,  1903,  1  Ch.  Div.  586,  605- 


606,  affirmed,  sub  nom.  Shepheard 
v.  Broome,  1904,  App.  Cas.  342; 
Cackett  v.  Keswick,  1902,  2  Ch.  Div. 
456,  468 ;  McConnell  v.  Wright,  1903, 
1  Ch.  Div.  546;  Stevens  v.  Hoare, 
20  Times  Law  Rep.  407;  Weatherbe 
v.  Whitney,  30  Nova  Scotia  104. 

See  ante,  §  269. 

See  Sedgwick  on  Damages,  (9th 
ed.),  §  777,  et  seq.;  Sutherland  on 
Damages,  (3rd  ed.),  §§  1171-1172. 

The  courts  of  Arkansas  appar- 
ently allow  the  plaintiff  an  election 
as  to  which  measure  of  damages 
shall  be  applied.  See  Matlock  v. 
Reppy,  47  Ark.  148,  14  S.  W.  546. 

It  is  said  in  Duffy  v.  McKenna, 
(82  N.  J.  L.  62,  67,  81  Atl.  1101), 
that  the  measure  of  damages  is  the 
difference  between  the  price  paid  by 
the  plaintiff  and  the  value  of  the 
shares  at  the  time  of  the  discovery 
of  the  fraud. 


498  THE  LAW  OF  PROMOTERS. 

action,  that  he  has  no  personal  interest  therein,  that  he  is  taking 
shares  upon  the  same  basis  as  the  other  subscribers,  or  that  he 
has  no  interest  in  the  property  to  be  sold  to  the  corporation,  the 
application  of  the  rule  of  damages  first  stated,  would  often  re- 
sult in  the  recovery  of  a  very  insignificant  judgment.  The  real 
injury  is  in  such  case  not  measured  by  the  amount  that  the 
unlawful  profit  taken  by  the  promoter  reduced  the  value  of  the 
shares.  The  injury  lies  in  the  fact  that  the  judgment  of 
the  subscribers  was  affected  by  the  consideration  that  the  pro- 
moter, who  was  thoroughly  familiar  with  the  enterprise,  was  risk- 
ing his  own  money  therein.  Had  the  subscribers  known  that  the 
promoter  was  taking  no  risk,  but  was,  regardless  of  the  success 
or  failure  of  the  enterprise,  secured  against  personal  loss,  they 
would  undoubtedly  have  accepted  his  suggestions  in  a  more 
guarded  spirit,  and  perhaps  have  summarily  refused  to  subscribe 
for  shares.  If  the  subscribers  show  that  their  purchase  was  in- 
duced by  the  false  representations  of  the  promoter,  the  proper 
measure  of  their  damage  is  the  sum  which  they  lost  by  reason 
of  their  ill-advised  investment.46 

If  the  measure  of  damages  is  the  difference  between  the  price 
the  plaintiff  paid  for  his  shares  and  the  value  thereof  at  the  time 
of  the  purchase,  the  general  rule  that  market  prices  are  the 
standard  of  value  is  not  applicable;  for  the  purchase  induced  by 
the  fraud  is  frequently,  if  not  generally,  made  at  the  market  price, 
and  this  market  price  is  very  often  the  result  of  the  very  fraud  of 
which  the  plaintiff  complains.47  If  the  market  value  were  taken 

46.  The    same    result    would    be  tively  the  case. 

reached  by  the  application  of  either         47.  Hindman  v.  First  Natl.  Bank, 

rule    of    damages    in    any    case    in  112  Fed.  Rep.  931,  936,  50  C.  C.  A. 

which  the  shares  would,  had  all  the  623,  57  L.  R.  A.  108 ;  Peek  v.  Derry, 

representations  been  true,  have  been  L.  R.  37  Ch.  Div.  541,  591,  et  seq., 

worth  the  precise  sum  paid  there-  (reversed    on    other    grounds,    s«6 

for  by  the  plaintiff.    This,  it  is  said  nom.  Derry  v.  Peek,  L.  R.  14  App. 

in   McConnell   v.   Wright,    (1903,   1  Cas.    337)  ;    McConnell    v.    Wright, 

Ch.  Div.  546,  556,  559),  is  presump-  1903,  1  Ch.  Div.  546,  557;   Broome 


MEASURE  OF  RECOVERY. 


499 


as  the  standard,  the  recovery  would  frequently  be  limited  to 
nominal  damages  and  a  miscarriage  of  justice  would  result.  The 
damages  resulting  from  a  subscription  for  shares  induced  by 
fraud  and  deceit  is  therefore  from  the  necessities  of  the  case  the 
difference  between  the  price  paid  and  the  intrinsic  value  of  the 
shares,48  the  market  value  being  regarded  only  as  evidence,  and  not 
very  substantial  evidence,  of  intrinsic  value.49  Subsequent  events 
in  the  history  of  the  company,50  such  as  the  amount  which  the 
shares  ultimately  yielded  to  the  holders  upon  the -winding  up  of 
the  company,  may  be  taken  into  consideration,  at  least  if  no  more 
satisfactory  evidence  can  be  found,  in  determining  the  intrinsic 


v.  Speak,  1903,  1  Ch.  Div.  586,  606, 
affirmed,  sub  nom.  Shepheard  v. 
Brooine,  1904,  App.  Gas.  342. 

Cf.  Whiting  v.  Price,  172  Mass. 
240,  242,  51  N.  E.  1084,  (cited  in 
Honsucle  v.  Ruffin,  172  Mass.  420, 
422,  52  N.  E.  538,  and  in  National 
Bank  of  Commerce  v.  New  Bedford, 
175  Mass.  257,  262,  56  N.  E.  288), 
and  Warner  v.  Benjamin,  89  Wis. 
290,  62  N.  W.  179,  where  the  other 
measure  of  damages  was  applied. 

48.  High  v.  Berret,  148  Pa.  261, 
23  Atl.  1004;  Twycross  v.  Grant,  L. 
R.  2  C.  P.  Div.  469,  489-491,  505; 
Davidson  v.  Tulloch,  3  Macq.  783, 
790,  794,  2  L.  T.  N.  S.  97;  Ark- 
wright  v.  Newbold,  L.  R.  17  Ch.  Div. 
301,  312,  (reversed  on  another 
ground,  see  page  316,  et  seq.)  ;  Arni- 
son  v.  Smith,  L.  R.  41  Ch.  Div.  348, 
363 ;  Cackett  v.  Keswick,  1902,  2  Ch. 
Div.  456,  468-469,  and  see  cases 
cited  under  note  47. 

Cf.  Redding  v.  Godwin,  44  Minn. 
355,  46  N.  W.  563. 

A  properly  qualified  witness  may 
be  permitted  to  give  his  opinion  as 


to  such  value.  See  Chamberlayne 
on  The  Modern  Law  of  Evidence, 
§  2175e. 

The  fact  that  the  plaintiff  has 
resold  the  securities  at  a  profit  has 
been  held  immaterial.  Clark  v. 
Morgan  County  Nat'l  Bank,  196  Fed. 
Rep.  709. 

49.  Twycross  v.  Grant,  L.  R.  2  C.  P. 
D.  469,  489,  490,  545,  et  seq.;  Smith 
v.  Duffy,  57  N.  J.  Law  679,  690,  32 
Atl.  371;   Peek  v.  Derry,  L.  R.  37 
Ch.  Div.  541,  591,  et  seq.,  (reversed 
on  another  point,  sub  nom.  Derry  v. 
Peek,  L.  R.  14  App.  Cas.  337) ;  see 
Hubbell  v.  Meigs,  50  N.  Y.  480. 

The  burden  is  upon  the  plaintiff 
to  prove  that  damages  were  in  fact 
suffered.  Cackett  v.  Keswick,  1902, 
2  Ch.  Div.  456,  468. 

50.  Hindman   v.   First  Nat'l  Bk., 
112  Fed.  Rep.  931,  50  C.  C.  A.  623, 
57  L.  R.  A.  108;  San  Diego  Land  & 
Town  Co.  v.  Jasper,  189  U.  S.  439, 
444,  47  L.  Ed.  892,  and  cases  cited; 
Whiting    v.    Price,    172    Mass.    240, 
243,  51  N.  E.  1084,  70  Am.  St  Rep. 
262. 


500 


THE  LAW  OF  PROMOTERS. 


value  of  the  shares  at  the  time  of  their  issue.51  That  the  shares 
were  not,  in  fact,  worth  the  price  at  which  they  were  issued  to 
the  subscribers  may  be  shown  by  any  facts  indicating  that  the 
corporation  paid  more  for  the  assets  acquired  by  it  than  the  same 
were  reasonably  worth.52 

The  subscriber  has  in  some  cases  been  allowed  to  recover  the 
difference  between  the  price  which  he  paid  for  his  shares  and  their 
actual  value  after  the  fraud  ceased  to  be  operative  upon  him,  that 
is,  after  he  learned  of  the  deceit  and  was  in  a  position  to  exercise 
his  judgment  in  the  matter.53 


51.  Walker  v.  Russell,  186  Mass. 
69,  74,  71  N.  E.  86,  1  Am.  &  Eng. 
Ann.  Gas.  688;  Peek  v.  Derry,  L.  R. 
37  Ch.  Div.  541,  593,  (reversed  on 
another  point,  sub  nom.  Derry  v. 
Peek,  L.  R.  14  App.  Cas.  337)  ; 
Broome  v.  Speak,  1903,  1  Ch.  Div. 
586,  606,  622-623,  affirmed,  sub  nom. 
Shepheard  v.  Broome,  1904,  App. 
Cas.  342;  Jury  v.  Stoker,  L.  R.  9 
Jr.  385,  403. 


Such  evidence  is,  of  course,  open 
to  explanation.  See  Petrie  v. 
Guelph  Lumber  Co.,  11  Can.  S.  C. 
450,  481,  15  Am.  &  Eng.  Corp.  Cas. 
487,  513. 

52.  See  Broome  v.  Speak,  1903,  1 
Ch.  Div.  586,  606,  affirmed,  sub  nom. 
Shepheard    v.    Broome,    1904,    App. 
Cas.  342. 

53.  Goodwin    v.    Wilbur,    104    111. 
App.  45,  53-54;   Smith  v.  Duffy,  57 
N.  J.  Law  679,  690,  32  AtL  37L 


CHAPTER  XV. 

OF  THE  CRIMINAL  LIABILITY  or  PROMOTERS. 

Section  278.  Criminal  liability  for  fraud  upon  corporation. 

279.  Accepting    qualifying    shares    from    persons    adversely    in- 
terested. 

280.  Bubble  companies. 

281.  Criminal  liability  for  fraud  in  sale  of  shares. 

282.  The  English  Companies  Act. 

283.  Fraudulent  use  of  the  mails. 

§  278.  Criminal  liability  for  fraud  upon  the  corporation. 

A  promoter  may  under  the  authority  of  Queen  v.  Barber  l  be 
convicted  of  conspiracy  if  he  enters  into  an  agreement  with  per- 
sons selling  property  to  the  corporation,  that  such  vendors  shall 
secretly  pay  to  him  a  portion  of  the  purchase  price  to  be  received 
from  the  corporation. 

§  279.  Accepting  qualifying  shares  from  persons  adversely  in- 
terested. 

In  Twycross  v.  Grant,2  it  was  agreed  that  the  contractors  who 
were  to  construct  and  sell  to  the  proposed  corporation,  two  lines 
of  tramways  to  be  operated  by  it,  should  qualify  the  directors. 
Lord  Justice  Bramwell  said,  "  As  to  the  cost  of  qualifying  the  di- 
rectors, nothing  can  be  said  to  extenuate  it,  except  that  honor- 

1.  3  Times  Law  Rep.  491.  of  his  acting  in  any  particular  man- 

The  New  York  statute  making  it  ner  in  his  principal's  business,   (see 

a   misdemeanor   for   an   agent,  em-  Penal    Law — Laws    of    1909,   Chap. 

ployee  or  servant  to  receive,  with-  88,  §  439),  probably  does  not  apply 

out  the  knowledge  of  his  principal,  to  promoters  of  corporations. 

a  gift  or  gratuity  in  consideration         2.  L.  R.  2  C.  P.  D.  469,  493. 

(501) 


502  THE  LAW  OF  PROMOTERS. 

able  men  have  been  parties  to  such  transactions,  though  not  see- 
ing their,  to  me,  obvious  impropriety.  The  impropriety  of  being 
nominees  of  sellers  and  at  the  same  time  agents  of  buyers,  a  thing 
the  impropriety  of  which  I  had  occasion  to  point  out  as  long  as 
thirty-five  years  ago,  with  a  warning  that  it  might  bring  the 
parties  to  it  within  the  law  of  conspiracy." 

§  280.  Bubble  companies. 

The  court  in  Duvergier  v.  Fellows  3  said,  "  It  is  apparent  from 
the  facts  disclosed  by  the  condition  of  this  bond  and  the  patents, 
that  the  scheme  in  which  the  parties  to  this  action  were  engaged 
was  one  of  those  bubbles  by  which,  to  the  disgrace  of  the  present 
age,  a  few  projectors  have  obtained  the  money  of  a  great  number 
of  ignorant  and  credulous  persons,  to  the  ruin  of  those  dupes  and 
their  families,  and  by  which  a  passion  for  gambling  has  been 
excited,  that  has  been  most  injurious  to  commerce  and  to  the 
morals  of  the  people.  What  any  one  must  discover  from  reading 
the  instruments,  the  parties  to  them  must  be  fully  informed  of. 
It  cannot  be  too  well  known,  that  there  is  no  place  for  persons 
engaged  in  such  transactions  in  courts  appointed  for  the  deci- 
sion of  civil  causes.  Although  the  statute  of  6  G.  I  be  repealed, 
the  common  law  relating  to  such  schemes  is  expressly  reserved  by 
the  repealing  statute;  and  no  one  doubts,  if  it  can  be  shown,  as 
it  easily  may,  that  such  schemes  are  fraud-traps,  and  injurious 
to  the  public  welfare,  that  the  forming  of  them  is  an  indictable 
offense  at  the  common  law." 

§  281.  Criminal  liability  for  fraud  in  sale  of  shares. 

Promoters  who  join  in  issuing  false  statements  to  deceive  the 
public  and  delude  them  into  purchasing  shares,  may  be  convicted 
of  conspiracy.4  It  is  not  necessary  that  the  falsehood  consist  of 

3.  5  Bing.  248,  266.  May  4-9,  1898 ;  Reg.  v.  Lupton,  et  al. 

4.  In  re  Gold  Co.,  L.  R.  11  Ch.      London   Times,    August   2-8,    1898; 
Div.  701,  723,  48  L.  J.  Ch.  281 ;  Reg.      Reg.  v.  Esdaile,  1  F.  &  F.  213. 

v.  Brinsmead,  et  al.  London  Times, 


CRIMINAL  LIABILITY.  503 

a  direct  affirmation  of  what  is  not  so.  A  charge  of  conspiracy 
may  be  predicated  upon  any  act  of  the  conspirators  by  which  a 
false  impression  is  created.5  A  charge  of  conspiracy  may  also  be 
based  upon  the  declaration  of  a  fictitious  dividend,6  upon  an 
agreement  to  create  an  apparent  market  by  ordering  the  pur- 
chase of  shares  at  a  premium,7  or  upon  the  procuring,  by  false 
reports,  the  listing  of  the  shares  with  the  purpose  of  inducing  the 
public  to  purchase  in  reliance  upon  the  false  assumption  that 
the  rules  of  the  Stock  Exchange  have  been  complied  with.8 

A  recent  New  York  statute  provides  that  any  person  who,  with 
intent  to  deceive,  makes,  issues  or  publishes,  or  causes  to  be  made, 
issued  or  published,  any  statement  or  advertisement  as  to  the 
value,  or  as  to  facts  affecting  the  value,  of  the  stocks,  bonds  or 
other  evidences  of  debt  of  a  corporation,  or  as  to  the  financial 
condition  of  9  facts  affecting  the  financial  condition  of  any  cor- 
poration, which  has  issued,  is  issuing,  or  is  about  to  issue  stocks, 
bonds  or  other  evidences  of  debt,  and  who  knows,  or  has  reason- 
able ground  to  believe  that  any  material  representation,  predic- 
tion or  promise  made  in  such  statement  or  advertisement  is  false, 
is  guilty  of  a  felony.10  Another  statute,  enacted  at  the  same 
time,  provides  that  a  person  who,  with  intent  to  deceive,  reports, 
or  publishes,  or  causes  to  be  reported  or  published  as  a  purchase 
or  sale  of  the  stocks,  bonds  or  other  evidences  of  debt  of  a  corpo- 
ration, any  transaction  therein  whereby  no  actual  change  of 
ownership  or  interest  is  effected,  is  likewise  guilty  of  a  felony.11 

5.  Burnes  v.  Pennell,  2  H.  L.  Gas.      B.  D.  730,  affirmed,  L.  R.  2  Q.  B.  D. 
497,  525.    See  also  Queen  v.  Aspinall,      48. 

L.  R.  1  Q.  B.  D.  730,  743,  affirmed,  9.  So  in  original. 

L.  R.  2  Q.  B.  D.  48,  59;  Rex  v.  Ber-  10.  New  York  Penal  Law,  §  952, 

enger,  3  M.  &  S.  67.  (added  by  Chapter  475  of  the  laws 

6.  Burnes  v.  Pennell,  2  H.  L.  Gas.  of  1913). 

497,  525.  11.  New  York  Penal  Law,  §  951, 

7.  Scott  v.   Brown,   Doering,  Me-  (added  by  Chapter  476  of  the  lawa 
Nab  &  Co.,  1892,  2  Q.  B.  D.  724.  of  1913). 

8.  Queen  v.  Aspinall,  L.  R.  1  Q. 


504 


THE  LAW  OF  PROMOTERS. 


§  282.  The  English  Companies  Act. 

Any  person  who  wilfully  makes  a  false  representation  in  the 
statement  which  the  English  Companies  Act  requires  to  be  filed 
in  lieu  of  a  prospectus  where  no  prospectus  is  issued,  is  guilty  of 
a,  misdemeanor  and  liable  to  fine  and  imprisonment,  but  false 
statements  in  the  prospectus  itself  do  not  seem  to  fall  within  the, 
penal  provision  of  the  statute.12 

§  283.  Fraudulent  use  of  the  mails. 

In  this  country  criminal  prosecutions  against  promoters  have 
generally  been  brought  under  the  Federal  statute  declaring  the 
use  of  the  mails  for  purposes  of  fraud,  a  criminal  offense.13 


12.  See     Companies     Act,     1908, 
(Stat    8   Edw.    VII.,    chap.    69),    § 
281,     Fifth     Schedule    and     §     82, 
amended,   Stat.  1  &  2  Geo.   V,  Ch. 
6,  §  17.    See  §  5  of  same  statute. 

Section  84  of  Chapter  96  of  the 
Statutes  of  24  &  25  Victoria,  ap- 
parently does  not  apply  to  pro- 
moters as  such.  (As  to  the  mean- 
ing of  the  word  "  manager  "  as  used 
-therein,  see  Rex  v.  Lawson,  1905,  1 
K.  B.  541,  74  L.  J.  K.  B.  N.  S.  296). 
It  was  for  violating  this  section,  and 
^section  83  of  the  same  act,  that 
Whitaker  Wright  was  tried  and  con- 
Tlcted.  See  Rex  v.  Wright,  London 
Times,  Jan.  12-27,  1904. 

13.  See   for   example   Wilson   v. 


United  States,  221  U.  S.  361,  31 
Sup.  Ct.  538,  55  L.  Ed.  771;  Wilson 
v.  United  States,  190  Fed.  Rep.  427, 
111  C.  C.  A.  231;  Parker  v.  United 
States,  203  Fed.  Rep.  950,  122  C.  C. 
A.  252;  Mitchell  v.  United  States, 
196  Fed.  Rep.  874,  116  C.  C.  A.  436 ; 
Horn  v.  United  States,  182  Fed.  Rep. 
721,  105  C.  C.  A.  163;  Gould  v. 
United  States,  209  Fed.  Rep.  730, 
126  C.  C.  A.  454 ;  Sandals  v.  United 
States,  213  Fed.  Rep.  569,  130  C.  C. 
A.  149. 

The  provision  in  question  is  now 
contained  in  §  215  of  the  Federal 
Criminal  Code  enacted  March  4, 
1909,  superseding  §  5480  of  the  Fed- 
eral Statutes. 


CHAPTER   XVI. 

OF  VENDORS  OF  PROPERTY  AND  THEIR  RELATION  TO  THE  PRO- 
MOTER. 

Section  284.  Introductory. 

285.  Liability  of  vendor  for  misrepresentations  made  to  promoter. 

286.  Rescission  of  purchase  because  of  fraud  in  promotion  com- 
mitted by  vendor's  agent. 

287.  Responsibility    of    vendor    assisting    promoter    in    obtaining 
secret  profit. 

288.  Liability  of  vendor  for  commission  to  be  paid  to  promoter. 

289.  The  same  subject. — Effect  of  compromise  between  vendor  and 
promoter. 

290.  The  same  subject. — Liability  of  vendor  after  full  payment  to 
promoter. 

291.  Responsibility   of   vendor   of   property   for   false  representa- 
tions of  promoter  made  upon  sale  of  shares. 

292.  Rights  of  vendor  receiving  payment  in  shares. 

293.  Rights  of  vendor  receiving  payment  in  bonds. 

294.  Rights  of  persons  donating  lands  to  corporation. 

295.  Relation  inter  ge^ot  persons  selling  property  to  corporation. 

§  284.  Introductory. 

It  frequently  happens  that  the  promoters  are  themselves  the 
owners  of  the  property  which  the  corporation  is  organized  to  ac- 
quire. Their  relation  of  vendors  to  the  corporation  becomes  in 
such  case  involved  with  their  fiduciary  obligations  as  promoters 
of  the  corporation.  The  rights  and  liabilities  arising  from  this 
dual  relation  have  already  been  considered.  If  the  owners  of  the 
property  to  be  acquired  do  not  aid  in  the  promotion  of  the  cor- 
poration, and  deal  at  arm's  length  both  with-  the  company  and 

(505) 


506  THE  LAW  OF  PROMOTERS. 

its  promoter,  they  are  subject  to  no  fiduciary  obligations.1  The 
rights  and  liabilities  of  the  vendors  are  in  such  case  controlled  by 
the  rules  of  law  generally  applicable  to  vendors  and  purchasers. 
A  consideration  of  these  rules  is  not  within  the  scope  of  the  pres- 
ent work.  It  is,  however,  proposed  to  consider  the  rights  and 
liabilities  of  the  vendors  as  affected  by  the  acts  of  the  promoter. 

§  285.  Liability  of  vendor  for  misrepresentations  made  to  pro- 
moter. 

If  the  owner  of  property  procures  a  sale  thereof  to  the  cor- 
poration by  means  of  false  representations  made  to  its  pro- 
moters, he  may  be  held  liable  to  the  corporation  on  the  theory 
that  its  purchase  was  induced  by  fraud,  though  the  promoters  oc- 
cupied, at  the  time  that  the  representations  were  made,  no  official 
relation  to  the  corporation.2 

§  286.  Rescission  of  purchase  because  of  fraud  in  the  promo- 
tion of  the  corporation  committed  by  the  vendor's 
agent. 

It  sometimes  happens  that  an  agent  employed  by  the  owner  to 
sell  property,  promotes  a  corporation  to  make  the  purchase. 
The  responsibility  of  the  vendor  for  a  fraud  committed  by  the 

1.  Wiser  v.  Lawler,  189  U.  S.  260,  poration  at  arm's  length  as  a  non- 
265,  47  L.  Ed.  802,  23  S.  C.  624 ;  De-  fiduciary  vendor.  Dunlap  v.  Twin 
Klotz  v.  Broussard,  203  Fed.  Rep.  City  Power  Co.,  226  Fed.  Rep.  161, 
942,  122  C.  C.  A.  244 ;  South  Missouri  —  C.  C.  A.  — . 

Pine  Lumber  Co.  v.  Crommer;  202  2.  Scholfield  Gear  &  Pulley  Co.  v. 

Mo.  504,  518,  101  S.  W.  22;   South  Scholfield,  71  Conn.  1,  40  Atl.  1046; 

Joplin   Land  Co.   v.   Case,  104   Mo.  Mason  v.  Harris,  L.  R.  11  Ch.  Div. 

572,  578,  16  S.  W.  390,  392,  38  Am.  97.    Compare  Meyer  v.  Page,  112  N. 

&    Eng.    Corp.    Cas.    333;    Exter    v.  Y.  App.  Div.  625,  98  Supp.  739. 

Sawyer,  146  Mo.  302,  322,  47  S.  W.  Compare    also    Wiser    v.    Lawler, 

951,  956,  and  see  ante,  §  7.    .  189  U.  S.  260,  47  L.  Ed.  802,  23  Sup. 

One  cannot  claim,  under  an  agree-  Ct.   624,   where   the  representations 

ment,    a    share    of    the    promoter's  were  made  to  the  subscribers  after 

compensation,  and  at  the  same  time  the  purchase  had  been  made  by  the 

claim  the  right  to  deal  with  the  cor-  corporation.     See  also  ante,   §  234, 

and  notes. 


VENDORS.  5Q7 

agent  in  the  course  of  the  promotion  is,  in  such  case,  a  question 
not  free  from  difficulty.  If  the  agency  is  a  mere  agency  to  sell, 
the  agent  is  not,  in  promoting  the  corporation,  acting  within  the 
scope  of  his  agency,  and  the  principal  is  not  responsible  for  his 
acts  in  relation  thereto.3  If,  however,  the  purchase  by  the  corpo- 
ration is  induced  by  the  fraud  of  the  promoter,  whether  acting 
as  agent  of  the  vendor  or  as  promoter  of  the  corporation,  the 
purchase  may  be  set  aside;  for  whether  or  not  the  fraud  can  be 
said  to  have  been  committed  by  the  agent  of  the  vendor,  the  latter 
cannot  repudiate  the  fraud  and  at  the  same  time  retain  the  bene- 
fits which  result  therefrom.4  In  Cortes  Co.  v.  Thannhauser,6  the 
defendants  had  obtained  an  option  to  purchase  the  Valle  Mines  at 
a  cost  of  $110,000,  and  employed  one  Brooks  to  sell  the  property, 
agreeing  that  Brooks  should  have  two-thirds  of  any  sum  above 
cost  realized  therefor.  Brooks  submitted  the  properties  to  Hatch 
&  Co.,  who  organized  the  plaintiff  corporation,  of  which  Brooks 
seems  to  have  been  one  of  the  promoters.  It  was  arranged  that 
the  mines  should  be  purchased  by  the  company  for  $150,000  net, 
and  that  Brooks  should  subscribe  for  $40,000  in  shares.  The 
defendants  knowing  that  Brooks  was  financially  irresponsible, 
induced  the  owners  to  accept  $80,000,  in  lieu  of  the  $110,000 
originally  agreed  upon.  Brooks  represented  to  the  other  pro- 
moters that  the  price  at  which  the  company  was  offered  the  prop- 
erty, was  the  price  which  the  original  owners  were  to  be  paid 
therefor,  and  that  neither  he  nor  the  defendants  were  to  receive 
any  profit  on  the  resale.  The  court  said  that  as  Brooks  was  the 
agent  of  the  defendants  on  the  sale,  his  fraud  was  imputable  to 
them,  notwithstanding  that  they  were  personally  innocent  of  any 
misrepresentation;  that  the  contract  that  the  defendants  were 
seeking  to  enforce  was  tainted  with  the  fraud  of  their  agent,  and 

3.  See  Forest  Land  Co.  v.  Bjork-         4.  See  ante,  §  238. 
quist,  and  Godfrey  v.  Schneck,  dis-          5.  45  Fed.  Rep.  730. 
cussed  in  the  text 


508  THE  LAW  OF  PROMOTERS. 

that  they  could  not  repudiate  his  acts  while  seeking  to  obtain  the 
fruits  thereof. 

If,  however,  the  fraud  is  committed  by  the  promoter  not  in  his 
capacity  as  agent  for  the  vendor  but  in  his  capacity  as  pro- 
moter of  the  corporation,  and  the  acts  complained  of  consist,  not 
of  fraudulent  representation  inducing  the  purchase,  but  of  the 
taking  of  an  unlawful  secret  profit  or  some  other  manner  of  fraud 
which  cannot  be  deemed  to  have  induced  the  purchase  or  in  any 
way  assisted  in  the  consummation  of  the  sale,  the  vendor «is,  unless 
a  party  to  the  fraud,  not  responsible  therefor,  and  the  company's 
purchase  cannot  be  rescinded  by  reason  thereof.6 

In  Godfrey  v.  Schneck,7  the  plaintiff,  being  the  owner  of  a 
tract  of  land,  placed  it  in  the  hands  of  one  Meyers  to  sell  at  a 
price  of  $525  an  acre.  Meyers  conceived  the  plan  of  organizing  a 
corporation  to  purchase  the  property,  and  interested  one  Whaley, 
it  being  agreed  that  the  land  should  be  conveyed  to  the  corpora- 
tion at  $600  an  acre,  Whaley  and  Meyers  to  divide  the  profit. 
Whaley  engaged  one  Hinners  to  assist  him  in  procuring  sub- 
scriptions and  agreed  to  give  him  one-half  of  his  share  of  the 
profits.  Whaley  and  Hinners  represented  to  the  defendant 
Schneck  that  the  land  could  be  secured  at  $600  an  acre,  and 
agreed  with  Schneck  that  if  he  would  assist  in  syndicating  it  at 
$750  an  acre,  he  should  have  one-third  of  the  difference.  Pending 
the  organization  of  the  company,  Whaley  represented  to  the  sub- 
scribers that  the  time  in  which  they  could  purchase  the  land  at 
the  price  mentioned  had  about  expired,  and  it  was  arranged  that 
Schneck  should  take  the  title,  and  hold  it  pending  incorporation. 
The  corporation  was  afterwards  formed  and  the  plan  consum- 
mated. Some  months  later  the  officers  of  the  company  discovered 
that  Whaley,  Hinners  and  Schneck  had  made  a  secret  profit, 
that  is,  the  difference  between  $600  and  $750  per  acre,  and  upon 
suit  being  threatened,  the  matter  was  settled  by  the  payment  of 

6.  See  cases  cited  in   succeeding      145  111.  App.  155,  169. 
notes,  also  Maxwell  v.  McWilliams,          7.  105  Wis.  568,  81  N.  W.  656. 


VENDORS.  509 

$1,500.  At  that  time  neither  the  officers  of  the  company  nor 
Schneck  knew  of  the  further  profit  made  by  Whalev,  Hinners 
and  Meyers.  The  company  upon  discovering  this  profit  offered 
to  rescind  the  transaction.  The  plaintiff,  being  threatened  with 
suit,  took  up  a  mortgage  upon  the  land  evidently  made  by  him 
before  the  sale,  and  sought  to  foreclose  it.  The  defendant  cor- 
poration and  Schneck  then  asked  for  a  rescission  of  the  sale,  and 
a  discharge  from  liability  on  the  mortgage.  The  court  said  that 
the  theory  of  the  defendants  was  that  the  division  of  the  profits 
between  Meyers  and  the  promoters  was  in  effect  a  bribe,  and  that 
Meyers  being  the  plaintiffs  agent  the  latter  must  be  held  re- 
sponsible; that  there  was,  however,  no  evidence  that  the  plaintiff 
had  any  actual  knowledge  of  Meyers'  plans,  or  shared  in  any 
way  in  the  profits ;  that  the  agency  of  Meyers  contemplated  the 
securing  of  a  purchaser  for  the  land ;  that  any  fraud  or  misrepre- 
sentation made  by  the  agent  in  the  scope  of  his  agency  would  be 
binding  on  the  principal,8  but  that  the  mere  authority  to  sell  did 
not  contemplate  the  organization  of  a  corporation  to  purchase; 
that  the  agent's  acts  were  not  done  in  the  interest  of  his  em- 
ployer nor  for  his  profit,  but  were  distinctly  personal  and  pri- 
marily to  the  agent's  own  advantage;  that  they  were  not  in  legal 
contemplation  the  acts  of  the  principal  and  that  the  principal 
could  not  be  bound  thereby. 

In  Forest  Land  Company  v.  Bjorkquist,9  the  defendant  being 
the  owner  of  certain  premises  gave  to  one  Myers  the  privilege  of 
selling  the  property  at  such  a  price  that  Bjorkquist  should  re- 
ceive $30,000  net.  Myers  thereupon  caused  the  plaintiff  com- 
pany to  be  incorporated  and  to  purchase  the  property  at  a  price 
of  $32,000,  the  defendant  giving  a  deed  to  the  company  reciting 
a  consideration  of  $32,000  and  Myers  retaining  $2,000  in  the 
stock  of  the  company  as  his  commission.  The  corporation 
brought  an  action  to  set  aside  its  purchase,  and  for  incidental 

8.  Citing  Law  v.  Grant,  37  Wis.      §  204. 
548.     As  to  this  question  see  ante,         9.  110  Wis.  547,  86  N.  W.  183. 


510  THE  LAW  OF  PROMOTERS. 

relief.  The  court  after  stating  that  an  owner  of  property  who 
aids  the  promoter  in  secretly  perpetrating  a  fraud  and  receives  a 
portion  of  the  profits  is  accountable  to  the  corporation,  said  that 
Bjorkquist  employed  Myers  simply  to  find  a  purchaser;  that 
Bjorkquist  first  ascertained  that  a  corporation  was  to  be  the 
purchaser  a  few  days  prior  to  the  date  of  the  deed;  that  Bjork- 
quist did  not  stand  in  any  fiduciary  relation  to  the  plaintiff  or 
to  the  subscribers  for  its  capital  stock,  and  owed  neither  to  it 
nor  to  them  any  duty  to  refrain  from  making  a  sale  undar  the  cir- 
cumstances stated;  that  the  mere  authority  of  Myers  to  find  a 
purchaser  of  the  land  did  not  contemplate  the  organization  of  a 
corporation  to  effectuate  the  purchase,  and  that  Myers'  acts  in 
assisting  in  the  formation  of  the  corporation  were,  in  the  absence 
of  evidence  showing  that  Bjorkquist  had  knowledge  of  Myers* 
plans  or  shared  in  his  profits,  outside  of  the  real  or  apparent 
scope  of  the  authority  given  by  Bjorkquist  and  not  binding  upon 
him,  citing  Godfrey  v.  Schneck,  supra. 

§  287.  Responsibility  of  vendor  assisting  promoter  in  obtain- 
ing secret  profit. 

While,  as  shown  in  the  preceding  section,  a  sale  to  the  corpo- 
ration cannot  be  set  aside  as  against  innocent  vendors,  because  of 
a  secret  profit  taken  by  the  promoter,  the  vendors  may  be  held 
responsible  if  the  promoter's  profit  was  obtained  with  their  aid 
or  connivance.  If  the  vendors  pay  the  promoter  a  secret  commis- 
sion, or,  in  order  to  enable  him  to  secure  a  secret  profit,  state  an 
exaggerated  consideration  in  their  deed  or  give  him  a  receipt  for 
a  sum  larger  than  that  actually  paid,  the  vendors  become  parties 
to  the  promoter's  fraud,  and  the  corporation  may,  at  its  election, 
rescind  its  purchase  10  or  hold  the  vendors  jointly  liable  with  the 

10.  Commonwealth  S.  S.  Co.  v.  131  C.  C.  A.  596;  Finck  v.  Canada- 
American  Shipbuilding  Co.,  197  Fed.  way  Fertilizer  Co.,  152  N.  Y.  App. 
Rep.  780 ;  same  v.  same,  197  Fed.  Div.  391, 136  Supp.  914,  modified  and 
Rep.  797,  affirmed,  215  Fed.  Rep.  296,  affirmed,  208  N.  Y.  607,  102  N.  E. 


VENDORS. 


511 


promoter  in  an  action  for  damages  ll  or  in  an  action  for  the  re- 
covery of  the  promoter's  profit.12  It  is,  in  such  case,  immaterial 
that  the  vendors  received  no  direct  benefit  from  the  promoter's 
fraud.13 

In  Emery  v.  Parrott,14  the  agent  of  the  vendor  entered  into 
an   agreement  with  the  promoter  of  the  vendee  corporation  to 


1102;  Limited  Inv.  Assoc.  v.  Glen- 
dale  Inv.  Assoc.,  99  Wis.  54,  74  N. 
W.  633;  Atwool  v.  Merry  weather, 
L.  R.  5  Eq.  464n,  37  L.  J.  Ch.  N.  S. 
35;  Bagnall  v.  Carlton,  L.  R.  6  Ch. 
Div.  371,  385,  399;  Lindsay  Petro- 
leum Co.  v.  Kurd,  L.  R.  5  P.  C.  221, 
243-244;  Emma  Silver  Mining  Co. 
v.  Lewis,  L.  R.  4  C.  P.  D.  396,  408- 
409.  See  also  Maxwell  v.  Port 
Tennant,  etc.,  Co.,  24  Beav.  495. 

But  see  ante,  §  286,  particu- 
larly Godfrey  v.  Schneck,  and 
Forest  Land  Co.  v.  Bjorkquist,  there 
discussed. 

The  contract  may  be  rescinded  at 
the  suit  of  the  corporation,  although 
it  was  in  form  a  contract  of  sale 
to  the  promoters  "  as  trustees,"  and 
by  the  promoters  assigned  to  the 
corporation  when  organized.  Am- 
erican Shipbuilding  Co.  v.  Common- 
wealth S.  S.  Co.,  215  Fed.  Rep.  296, 
131  C.  C.  A.  596. 

The  action  is  not  one  in  which 
the  corporation  sues  as  assignee 
within  the  meaning  of  §  629  of  the 
United  States  Revised  Statutes  pro- 
viding that  no  Federal  court  shall 
have  cognizance  of  any  suit  "  to  re- 
cover the  contents  of  any.  .  .  .  chose 
in  action  in  favor  of  any  assignee 
....  unless  such  suit  might  have 
been  prosecuted  in  such  court  to  re- 


cover the  said  contents  it  no  as- 
signment or  transfer  had  been 
made."  Commonwealth  S.  S.  Co.  v. 
American  Shipbuilding  Co.,  197  Fed. 
Rep.  780;  same  v.  same,  197  Fed. 
Rep.  797,  affirmed,  215  Fed.  Rep. 
296,  131  C.  C.  A.  596. 

11.  Lomita  Land  &  Water  Co.  v. 
Robinson,    154    Cal.    36,    45-46,    97 
Pac.  10,  18  L.  R.  A.  N.  S.  1106,  1123- 
1124,  and  authorities  there  cited. 

Stoney  Creek  Woolen  Co.  v. 
Smalley,  111  Mich.  321,  69  N.  W. 
722. 

Forest  Land  Co.  v.  Bjorkquist,  110 
Wis.  547,  551-552,  86  N.  W.  183,  184, 
and  cases  cited;  Fountain  Spring 
Park  Co.  v.  Roberts,  92  Wis.  345,  66 
N.  W.  399,  53  Am.  St.  Rep.  917. 

Bagnall  v.  Carlton,  L.  R.  6  Ch. 
D.  371,  385,  et  seq.;  Lindsay  Petro- 
leum Co.  v.  Kurd,  L.  R.  5  P.  C.  221, 
232,  243. 

12.  See  cases  cited  under  note  14, 
also  §§  288-290.    Compare,  however, 
Bennett  v.  Havelock  E.  L.  &  P.  Co., 
21  Ont.  L.  R.  120,  16  Ont.  Week  Rep. 
19. 

13.  Stoney  Creek  Woolen  Co.  v. 
Smalley,   111   Mich.  321,  69  N.   W. 
722. 

14.  107   Mass.   95.     A   case   very 
similar    in    principle    is    Tegarden 
Bros.  v.  Big  Star  Zinc  Co.,  71  Ark. 
277,  72  S.  W.  989. 


512  THE  LAW  OF  PROMOTERS. 

divide  with  the  promoter  the  commissions  upon  the  sale.  The 
court  held  that  though  the  agent  of  the  vendor  did  not,  as  such, 
stand  in  any  fiduciary  relation  to  the  purchasing  corporation,  he 
knew  the  position  of  the  promoter  and  by  his  agreement  became 
a  partner  with  the  latter,  and  that  the  two  were  jointly  and  sev- 
erally liable  not  only  for  the  one-half  of  the  commission  paid  to 
the  promoter,  but  for  the  entire  commission  received  by  the  agent 
of  the  vendor. 

Before  the  vendors  can  be  held  liable  for  assisting  the  pro- 
moter to  obtain  an  unlawful  profit,  their  intent  to  so  assist  the 
promoter  must  be  shown.15  If  the  promoter  acted  as  agent  of 
the  vendors  on  the  sale  to  the  corporation  and  they  paid  him  his 
commission  in  ignorance  of  the  fact  that  he  had  become  one  of 
the  promoters  of  the  vendee  company,  they  cannot  be  held  liable 
to  the  corporation  as  parties  to  the  promoter's  fraud.16  In 
South  Missouri  Pine  Lumber  Co.  v.  Crommer,17  the  defendants 
William  Crommer  and  William  F.  Crommer,  the  owners  of  certain 
property,  were  in  financial  straits,  and  being  anxious  to  dispose  of 
their  property,  authorized  the  defendant  Newhouse  to  sell  it  for 
$21,000,  agreeing  to  pay  him,  as  his  commission  on  the  sale,  the 
sum  of  $500  and  whatever  he  could  obtain  above  $21,000.  New- 
house  interested  one  Ewart  and  others  who  organized  the  plaintiff 
company  to  take  over  the  property.  They  purchased  the  prop- 
erty at  a  price  of  $37,500 — of  which  $5,000  was  paid  in  cash, 
$13,000  in  notes,  $3,000  by  assuming  a  mortgage  on  the  premises, 
and  the  balance  by  giving  in  trade  certain  real  estate  belonging  to 
Ewart — and  resold  it  to  the  company  for  $50,000.  The  company 

15.  South  Missouri  Pine  Lumber  be  the  explanation  of  the  decision  in 
Co.  v.  Crommer,  202  Mo.  504,  101  S.  Forest  Land  Co.  v.  Bjorkquist,  lift 
W.  22;   Forest  Land  Co.  v.  Bjork-  Wis.   547,   86  N.   W.   183,    (ante,   § 
quist,  110  Wis.  547,  86  N.  W.  183.  286),  where  the  court  did  not  dis- 

16.  Heckman's  Estate,  172  Pa.  185,  cuss  the  fact  that  the  vendor  had 
33  Atl.   552,   and   see  Lands   Allot-  paid  a  commission  of  $2,000  to  the 
ment  Co.   v.  Broad,  13  Rep.  699,  2  promoter. 

Manson's  Bkpy.  Cas.  470.    This  may          17.  202  Mo.  504,  101  S.  W.  22. 


VENDORS.  513 

on  learning  that  the  property  given  by  Ewart  in  trade  to  the 
Crommers  was  not  worth  nearly  the  sum  at  which  it  was  put  in, 
and  that  the  Crommers  only  received  $21,000  of  the  purchase 
price,  brought  suit  against  Newhouse  and  the  Crommers,  claim- 
ing that  they,  by  raising  the  price  from  $21,000  to  $37,500,  had 
aided  Ewart  in  the  perpetration  of  a  fraud  upon  the  company, 
and  were  jointly  liable  with  him.  It  appeared  that  the  only  price 
ever  made  by  the  Crommers  and  Newhouse  to  the  promoters  of 
the  plaintiff  corporation,  was  $37,500,  and  the  court  said  that 
though  the  property  put  in  by  Ewart  was  not  worth  the  price 
at  which  it  was  taken  by  the  vendors,  Newhouse,  to  whom  this 
property  was  to  go  as  his  commission,  was  not  particular  at  what 
price  it  was  valued  in  the  trade;  that  fraud  and  collusion  will 
not  be  presumed,  but  must  be  proved,  and  that  there  was  not 
sufficient  evidence  to  connect  the  Crommers  and  Newhouse — the 
vendors  and  their  agent — with  the  fraud  of  Ewart  the  pro- 
moter. 

Though  the  vendors  do  not,  at  the  time  that  they  agree  with 
the  promoter  to  pay  him  a  commission,  know  of  his  relation  to 
the  corporation,  they  become  liable  to  the  corporation  for  the 
amount  of  such  commission  if  they  pay  it  after  they  have  learned 
of  the  relationship  between  the  promoter  and  the  corpora- 
tion.18 

The  corporation  may,  perhaps,  rescind  its  purchase,  or  recover 
the  amount  of  the  promoter's  commission  from  its  vendors  if 
they,  knowing  their  agent  to  be  a  promoter  of  the  corporation, 
pay  him  a  commission  on  the  sale  in  the  belief  that  the  matter 
has  been  disclosed  to  the  corporation,  for  the  vendors  could  in  such 
case,  readily  avoid  all  risk  by  themselves  disclosing  the  facts  to 
the  corporation.19  The  vendors  could  not,  however,  very  well 

18.  Grant  v.  Gold  Exploration  &  see  post,  §  290. 

Development   Synd.,   1900,   1   Q.   B.          19.  Grant  v.  Gold  Exploration  & 

D.  233,  240,  253.  Development   Synd.,   1900,   1   Q.   B. 

As  to  the  nature  of  such  liability,  D.  233,  248-250,  253,  and  cases  cited. 


514 


THE  LAW  OF  PROMOTERS. 


be  liable  for  damages  for  fraud  and  deceit  as  long  as  they  acted 
in  good  faith.20 

§  288.  Liability    of    vendor    for    commission    to    be    paid    to 

promoter. 

A  secret  agreement  between  the  owners  of  property  to  be  sold 
to  the  corporation  and  the  promoter,  by  which  they  agree  to  pay 
him  a  commission  upon  the  sale,  is  contrary  to  public  policy  and 
not  enforceable  at  the  suit  of  the  promoter.21  The  corporation 
may,  however,  if  it  discovers  the  agreement  before  the  commission 
is  paid,  compel  the  vendors  to  pay  the  amount  thereof  directly 
to  it.22  This  solution  is,  from  every  point  of  view,  just  and  fair. 


20.  Lands  Allotment  Co.  v.  Broad, 
13  Rep.  699,  2  Manson's  Bkcy.  Cas. 
470;  and  see  ante,  §§  207-208. 

21.  Yale  Gas  Stove  Co.  v.  Wilcox, 
64  Conn.  101,  29  Atl.  303,  25  L.  R. 
A.  90,  42  Am.  St.  Rep.  159,  47  Am. 
&   Eng.   Corp.   Cas.   647;   Koster  v. 
Pain,   41   N.   Y.   App.   Div.  443,   58 
Supp.  865,  and  see  Travis  v.  Travis, 
140  N.  Y.  App.  Div.  191,  124  Supp. 
1021;  Davison  v.  Seymour,  1  Bosw. 
(N.  Y.)  88;  Harrington  v.  Victoria 
Graving  Dock  Co.,  L.  R.  3  Q.  B.  D. 
549. 

Cf.  Boice  v.  Jones,  106  N.  Y.  App. 
Div.  547,  94  Supp.  896;  same  v. 
same,  86  N.  Y.  App.  Div.  613,  83 
Supp.  230. 

The  agreement  of  the  vendor  to 
compensate  the  promoters  is  valid 
and  enforceable  if  made  known  to 
the  corporation,  and  the  burden  is, 
in  an  action  by  the  promoters  to  re- 
cover such  compensation,  upon  the 
vendor  to  prove  fraud.  Dexter  v. 
McClellan,  116  Ala.  37,  22  So.  461, 
and  see  next  note. 


A  contract  of  similar  nature  was 
enforced  according  to  its  terms  in 
Hix  v.  Edison  Elec.  Light  Co.,  10  N. 
Y.  App.  Div.  75,  41  Supp.  680,  75 
N.  Y.  St.  R.  1067,  27  N.  Y.  App.  Div. 
248,  50  Supp.  592,  affirmed,  163  N. 
Y.  573,  57  N.  E.  1112. 

22.  Yale  Gas  Stove  Co.  v.  Wilcox, 
64  Conn.  101,  129,  29  Atl.  303,  25 
L.  R.  A.  90,  42  Am.  St.  Rep.  159, 
47  Am.  &  Eng.  Corp.  Cas.  647 ;  Ham- 
bleton  v.  Rhind,  84  Md.  456,  36  Atl. 
597,  40  L.  R.  A.  216;  Kuntz  v. 
Tonnele,  80  N.  J.  Eq.  373,  84  Atl. 
624 ;  Whaley  Bridge  Calico  Printing 
Co.  v.  Green,  L.  R.  5  Q.  B.  D.  109, 
28  W.  R.  351;  Grant  v.  Gold  Ex- 
ploration &  Development  Synd., 
1900,  1  Q.  B.  D.  233. 

As  to  the  form  of  action  in  such 
case,  see  Grant  v.  Gold  Exploration 
&  Development  Synd.,  1900,  1  Q.  B. 
D.  233. 

As  to  the  burden  in  such  case,  of 
proving  disclosure,  see  same  case  at 
page  244,  and  see  preceding  note. 


VENDORS.  515 

Compelling  the  vendors  to  pay  to  the  corporation  the  commission 
agreed  to  be  paid  to  the  promoter  works  no  hardship  upon  them. 
They  were  willing  to  part  with  their  property  at  the  price  de- 
manded of  the  corporation,  less  the  commission  agreed  to  be 
paid  to  the  promoter.  They  are  no  worse  off  by  being  made  to 
pay  the  commission  to  the  corporation  instead,  and  there  is  no 
reason  why  they  should  be  allowed  to  benefit  by  their  refusal  to 
carry  out  their  unlawful  agreement  with  the  promoter. 

§  289.  The  same  subject. — Effect  of  compromise  between  ven- 
dor and  promoter. 

The  fact  that  the  vendor  after  the  sale  to  the  corporation  had 
been  consummated  compromised,  at  a  smaller  sum  than  originally 
agreed  upon,  the  promoter's  claim  for  commissions  on  the  sale, 
is  not  a  bar  to  the  corporation's  claim  against  the  vendor  for  the 
balance  of  the  agreed  commission.  The  corporation's  claim 
against  the  vendor  having  accrued  before  the  compromise  with 
the  promoter,  its  rights  against  the  vendor  cannot  be  affected 
by  an  agreement  to  which  it  was  not  a  party.28 

§  290.  The  same  subject. — Liability  of  vendor  after  full  pay- 
ment to  promoter. 

A  question  less  free  from  difficulty  arises  in  regard  to  the  ven- 
dor's liability  to  the  corporation  after  the  unlawful  commission 
has  actually  been  paid  to  the  promoter.  As  the  payment  of  the 
commission  agreed  to  be  paid  to  the  promoter  can  be  enforced 
only  at  the  suit  of  the  corporation,  a  payment  thereof  to  the  pro- 
moter should,  if  strict  logic  is  to  be  applied,  have  no  bearing  upon 

23.  Grant  v.  Gold  Exploration  &  pelled  the  promoter  to  surrender  to 

Development  Synd.,  1900,  1  Q.  B.  D.  it  the  sum  received  by  him  from  the 

233.    See  also  §  290.    It  was,  in  the  vendor,  did  not  constitute  an  adop- 

case   just  cited,   further   held   that  tion  of  the  compromise  such  as  to 

the  circumstance  that  the  corpora-  bar  its  rights  to  collect  the  balance 

tion  had,  on  learning  the  facts,  com-  of  the  commission  from  the  vendor. 


516  THE  LAW  OF  PROMOTERS. 

the  vendor's  liability  to  the  corporation.24  Some  cases,  however, 
seem  to  indicate  that  the  promoter  is,  after  he  has  collected  his 
unlawful  commission,  primarily  liable  to  the  corporation,  and  that 
the  vendor  is  only  secondarily  liable  as  a  sort  of  surety  for  the 
promoter. 

In  Tyrrell  v.  Bank  of  London,25  one  Read  wishing  to  sell  cer- 
tain property  to  a  bank  then  in  process  of  organization,  of  which 
one  Tyrrell  was  the  solicitor,  agreed  in  case  of  a  sale  to  give 
Tyrrell  one-half  of  the  profits  of  the  transaction.  The  bank  was 
organized,  the  transaction  consummated,  and  his  share  of  the 
profits  paid  to  Tyrrell.  Upon  discovery  of  the  facts  the  bank 
brought  suit  against  Tyrrell  and  Read.  Judgment  was  given 
against  Tyrrell,  but  the  bill  was  dismissed  as  against  Read.  The 
lord  chancellor  said  that  "  as  Read  was  a  party  implicated  in 
the  violation  of  trust,  committed  by  Tyrrell,  I  should  have  been 
better  pleased  if  Read  had  been  retained  in  the  character  of  a 
surety  for  the  fulfilment  of  Tyrrell's  obligation."  This  dictum 
was  expressly  approved  by  Lord  Chelmsford. 

24.  See  Hambleton  v.  Rhind,  84  argument  denied,  210  N.  Y.  611,  104 
Md.  456,  36  Atl.  597,  40  L.  R.  A.  N.  E.  1129),  where  the  trial  court 
216 ;  Kuntz  v.  Tonnele,  80  N.  J.  Eq.  found  that  one  Pressberger  who  had 
373,  84  Atl.  624;  Lands  Allotment  sold  certain  real  estate  to  the  cor- 
Co.  v.  Broad,  13  Rep.  699,  2  Man-  poration,  had  agreed  with  its  pro- 
son's  Bkcy.  Gas.  470;  Grant  v.  Gold  moters  to  pay  to  them  $14,000  out 
Exploration  &  Development  Synd.,  of  the  purchase  price  paid  by  the 
1900,  1  Q.  B.  D.  233,  250,  251,  254.  corporation,  and  that  of  this  sum, 

It  is  held   in   Emery   v.   Parrott,  $7,385   had    been   paid   to   the   pro- 

107  Mass.  95,  that  the  agent  of  the  moters,    and     $6,615     remained    in 

vendor  who  divides  his  commission  Pressberger's    hands.      A    judgment 

with  the  agent  of  the  purchasers,  is  against  Pressberger  for  the  sum  of 

liable   with   the   latter   jointly   and  $6,615  was  reversed  on  the  ground 

severally  for  the  entire  amount  of  that  the  burden  was  upon  the  plain- 

the    commissions    divided    between  tiff   to    show   that   this   money    re- 

them.  mained  in  Pressberger's  possession, 

Compare,     however,      Ebling     v.  and  that  this  burden  had  not  been 

Nekarda,  (148  N.  Y.  App.  Div.  193,  sustained. 

132  Supp.  309,  affirmed,  210  N.   Y.          25.  10  H.   L.   Gas.  26,  47,  53,  11 

566,  104  N.  E.  1129,  motion  for  re-  Eng.  Rep.  934. 


VENDORS.  517 

In  Lindsay  Petroleum  Co.  v.  Hurd,26  one  Kemp  being  the  owner 
of  a  certain  lot,  and  one  Farewell  the  owner  of  two  other  lots, 
Farewell  made  a  colorable  transfer  of  his  lots  to  Kemp,  who  gave 
to  one  Hurd  a  month's  option  to  purchase  the  three  lots  at  the 
expressed  price  of  $13,750.00.  The  lots  were  then  conveyed  at 
the  option  price  to  the  plaintiff  company  of  which  Hurd  was  the 
promoter.  The  true  price  paid  by  Hurd  was  the  sum  of  $10,000, 
the  price  expressed  in  the  agreement  being  a  nominal  price  inserted 
in  furtherance  of  a  collusive  scheme  to  enable  Hurd  to  make  a 
profit  out  of  the  transaction.  Upon  the  discovery  of  this  fraud 
and  of  the  falsity  of  certain  other  representations,  suit  was 
brought,  and  the  vice  chancellor  decreed  the  rescission  of  the  pur- 
chase. An  appeal  was  taken  to  the  Court  of  Error  and  Appeal  in 
Ontario  which  reversed  the  decree  of  the  Chancery  Court  on  the 
ground  that  a  rescission  was  barred  by  laches.  Mr.  Justice 
Gwynne  said  that  the  company  was  "  still  entitled  to  a  decree 
against  Hurd  to  make  good  to  the  company  the  $3,750  which  he,  in 
breach  of  trust,  made  out  of  the  plaintiffs  "  *  and  the  other 

defendants  should  be  decreed  to  reinstate  that  amount  in  default 
of  the  plaintiffs  being  able  to  collect  it  of  Hurd ;  this  is  the  utmost 
extent  to  which  the  decree  should,  in  my  opinion,  go,  and  this  is 
the  decree  which  Tyrrell  v.  Bank  of  London  27  in  appeal,  war- 
rants. The  decree  should  be  primarily  against  Hurd,  who  was 
alone  guilty  of  a  breach  of  trust,  which  is  a  fraud  different  in 
its  character  from  that  committed  by  the  other  defendants.  All 
the  purposes  of  justice  are,  as  it  appears  to  me,  obtained  by  de- 
creeing the  party  guilty  of  that  breach  of  trust  to  restore  the 
fruits  of  his  fraud.  And  in  case  he  should  be  unable,  by  decreeing 
the  other  defendants  to  do  so  for  him."  28 

26.  L.  R.  5  P.  C.  221.  and  In  default  of  their  so  paying, 

27.  See  supra.  that  Farewell  should  pay  unto  the 

28.  It  is  stated  at  p.  236  that  an  present  appellants  ....  the  sum  of 
order  was  made  directing  that  Hurd  $3,750,  being  the  difference  between 
and   Kemp  "  should  forthwith  pay,  the   actual   and   the   nominal   price 


518  THE  LAW  OF  PROMOTERS. 

§  291.  Responsibility  of  vendor  of  property  for  false  repre- 
sentations of  promoter  made  upon  the  sale  of  cor- 
porate shares. 

While  a  sale  to  the  corporation  may  be  set  aside  if  brought 
about  by  the  fraud  of  the  promoter,  the  sale  of  property  to  the 
corporation  is  not  ordinarily  so  directly  connected  with  the  sale 
of  the  corporate  shares,  that  the  vendor  of  the  property  can  be 
made  responsible  for  the  fraudulent  representations  of  the  pro- 
moter entering  into  the  subsequent  sale  of  the  company's  shares. 
In  Wiser  v.  Lawler,29  the  defendants  were  the  owners  of  certain 
mines  known  as  the  "  Hillside  Group  "  which  they  agreed  to  sell 
to  one  Warner  at  $450,000,  of  which  $20,000  was  paid  in  cash. 
A  deed  was  executed  and  deposited  in  escrow  to  be  delivered  upon 
payment  of  the  full  purchase  price.  Warner  then  organized  a 
corporation,  to  which  were  assigned,  the  rights  under  the  escrow 
agreement  and  certain  properties.  Prospectuses  were  issued  which, 
in  addition  to  exaggerated  and  delusive  statements,  set  forth  in 
substance  that  the  corporation  held  title  to  the  Hillside  Group. 
Upon  the  discovery  of  the  fraud  an  action  was  brought  demand- 
ing judgment  that  the  defendants  be  estopped  from  disputing  the 
title  of  the  company  to  the  Hillside  Group,  that  they  be  made  to 
account  for  the  proceeds  of  all  the  ore  taken  from  the  mines,  or, 

of  the  said  lands,  etc."  This  does  reversed  by  the  Privy  Council,  (see 
not  seem  to  be  in  accord  with  the  pp.  239-246)  on  the  ground  that  the 
opinion  of  Mr.  Justice  Gwynne,  at  right  of  rescission  had  not  been  lost 
p.  235,  and  it  is  difficult  to  under-  by  laches,  and  that  the  company 
stand  why  Kemp  should  have  been  was  still  entitled  to  a  rescission  un- 
made liable  in  the  first  instance  less  it  had,  by  dissolution,  disabled 
and  Farewell  as  his  surety.  It  is  itself  from  making  the  necessary 
probable  that  there  is  a  clerical  reconveyance.  The  judgment  of  the 
error,  and  that  it  was  intended  Court  of  Error  and  Appeal  as  to  the 
that  Hurd  only  should  be  liable  in  secondary  liability  of  the  vendors 
the  first  instance,  and  the  others  as  does  not  seem  to  have  been  dis- 
sureties.  The  judgment  of  the  Court  turbed. 

of  Error  and  Appeal  in  Ontario  was  29.  189  U.  S.  260,  47  L.  Ed.  802, 

23  Sup.  Ct.  624. 


VENDORS.  519 

in  the  alternative,  for  a  money  decree  against  the  defendants  for 
the  amount  received  by  them  from  the  proceeds  of  subscriptions 
induced  by  the  fraudulent  prospectuses.  The  court  held  that  the 
defendants  were  not  promoters  of  the  company,  that  while  they 
might  have  known  of  the  prospectuses,  they  were  under  no  obliga- 
tion to  read  them,  or  to  contradict  their  exaggerated  statements 
and  promises ;  that  there  were  no  relations  between  themselves 
and  the  purchasers  of  the  shares,  that  they  were  under  no  duty 
to  interfere,  and  that  they  had  a  right  to  rely  upon  the  fact  that 
their  record  title  was  notice  to  every  one  who  contemplated  taking 
the  company's  shares.  The  court  said  that  if  it  were  shown  that 
the  prospectuses  were  put  forth  by  the  defendants  personally, 
they  could  justly  be  held  liable  as  participants  in  the  fraud,  but 
that  the  mere  fact  that  they  turned  over  the  organization  of  the 
company  to  others,  would  not  of  itself  charge  the  defendants  with 
the  duty  of  examining  and  verifying  the  statements  of  these  parties. 
The  court  pointed  out  that,  assuming  that  the  defendants  were 
fully  apprised  of  the  contents  of  the  prospectuses,  there  was  no 
way  in  which  they  could  have  given  notice,  not  knowing  the  names 
and  addresses  of  those  to  whom  prospectuses  had  been  sent,  and 
that  a  notice  to  the  company  would  have  been  futile  in  case  the  di- 
rectors chose  to  disregard  it. 

In  Hoyer  v.  Ludington,30  the  complaint  alleged  that  the  de- 
fendant Ludington  being  the  owner  of  certain  lands,  employed 
the  defendant  Myers  as  his  agent  to  effect  a  sale  thereof;  that 
the  defendant  Myers,  together  with  certain  other  persons,  pre- 
tended to  organize  a  corporation,  and  by  false  representations 
induced  the  plaintiff  to  subscribe  for  150  shares  of  stock;  that  the 
defendant  Ludington  had  at  about  that  time  conveyed  the  real 
estate  in  question  to  the  corporation,  that  the  moneys  procured 
from  the  plaintiff  on  the  subscription  for  his  shares  were  paid 
to  Ludington  for  such  conveyance  and  for  interest  on  a  mort- 

30.  100  Wis.  441,  76  N.  W.  348. 


THE  LAW  OF  PROMOTERS. 

gage  on  the  property,  and  that  the  stock  issued  to  the  plaintiff 
was  worthless.  The  plaintiff  demanded  judgment  for  the  amount 
paid  for  his  shares.  The  court  dismissed  the  complaint  as  against 
the  defendant  Ludington,  saying  that  the  alleged  false  represen- 
tations were  not  made  in  reference  to  the  sale  of  the  land  which 
was  the  subject  matter  of  Myers'  agency,  but  in  reference  to  the 
creating  and  organizing  of  a  corporation  to  purchase  the  land; 
that  there  was  no  pretense  that  Ludington  had  anything  to  do  with 
the  corporation  or  the  procuring  of  subscriptions  to  its  capital 
stock,  and  that  the  representations  of  Myers  in  relation  thereto 
were  not  within  the  apparent  scope  of  his  authority  to  sell  the 
land. 

In  DeKlotz  v.  Broussard,31  the  plaintiff  sold  his  lands  for 
$110,000  in  cash  and  one-third  of  the  profits  of  any  resale.  His 
vendees  promoted  a  corporation  to  which  they  resold  the  lands 
at  a  profit,  and  the  defendant  subscribed  for  shares  of  this  cor- 
poration. The  defendant  claimed  that  he  had  been  induced  to 
take  the  shares  by  the  fraudulent  representations  of  the  pro- 
moters, and  when  sued  by  the  plaintiff  upon  a  claim  purchased 
from  the  receiver  of  the  corporation,  set  up  a  counterclaim  for 
the  damages  resulting  from  the  fraudulent  representations  of  the 
promoters.  The  court  held  that  the  plaintiff  was  in  no  way  con- 
nected with  the  representations  complained  of,  and  was  not  re- 
sponsible therefor. 

A  sale  of  property  to  the  corporation  might  well  be  set  aside 
on  account  of  the  false  representations  made  to  procure  subscrip- 
tions for  the  shares  of  the  corporation,  if  these  false  represen- 
tations were  made  before  the  purchase  by  the  corporation  and 
could  fairly  be  said  to  have  influenced  the  corporate  action  in 
regard  thereto.32 

31.  203  Fed.  Rep.  942,  122  C.  O.         32.  See  ante,  §  285,  also  §  234. 
A.  244. 


VENDORS. 


521 


§  292.  Rights  of  vendor  receiving  payment  in  shares. 

If  the  purchase  price  of  property  sold  to  the  corporation  is  to 
be  paid  in  whole  or  in  part  by  an  issue  of  the  company's  shares, 
the  vendor  is  in  effect  a  subscriber  and  as  such  entitled  to  the 
same  rights  and  to  the  same  consideration  as  any  other  sub- 
scriber.33 If  the  promoters  are  guilty  of  taking  unlawful  profits 


33.  Shutts  v.  United  Box,  Board 
&  Paper  Co.,  67  N.  J.  Eq.  225,  58 
Atl.  1075;  Beatty  v.  Neelon,  12  Ont. 
App.  50,  12  Am.  &  Eng.  Corp.  Gas. 
20,  affirmed,  13  Can.  S.  C.  1,  19 
Am.  &  Eng.  Corp.  Cas.  236,  and  see 
Minister  of  Rys.  &  Canals  v.  Quebec 
South.  Ry.  Co.,  12  Exch.  Rep.  of 
Can.  11,  24. 

Compare  Brehm  v.  Sperry,  Jones 
&  Co.,  92  Md.  378,  48  Atl.  368.  In 
that  case  the  complaint  alleged  that 
the  plaintiff,  Brehm,  being  the 
owner  of  a  certain  brewery  prop- 
erty, entered  into  an  agreement  with 
Sperry,  Jones  &  Co.,  (who  were  en- 
deavoring to  consolidate  a  number 
of  breweries ) ,  by  the  terms  of  which 
Sperry,  Jones  &  Co.,  were  to  organ- 
ize the  Maryland  Brewing  Co., 
which  was  to  have  a  capital  of  $6,- 
500,000,  one-half  in  preferred  and 
one-half  in  common  stock,  and  to 
issue  bonds  not  to  exceed  $7,500,- 
000;  that  the  issue  of  the  shares 
and  bonds  was  to  be  used  entirely 
for  the  purchase  of  the  brewery 
properties  to  be  acquired,  and  to 
provide  a  working  capital  of  not  less 
than  $500,000;  that  the  issue  of 
shares  and  bonds  to  the  amount 
mentioned  was  predicated  upon  the 
company  starting  with  the  control 
of  breweries  having  an  annual  out- 
put of  700,000  barrels ;  that  the  con- 


solidation  was  nevertheless  to  take 
place  provided  that  the  consoli- 
dated company  should  embrace  cer- 
tain specified  breweries,  and  that 
the  output  of  the  consolidated 
breweries  should  equal  at  least 
560,000  barrels;  that  in  the  event 
that  the  output  should  be  less  than 
700,000  barrels,  the  issue  of  stocks 
and  bonds  should  be  reduced  at  the 
rate  of  $20.  per  barrel ;  that  Sperry, 
Jones  &  Co.  should  furnish  $500,- 
000  in  cash  for  working  capi- 
tal, and  were  to  receive  for  such 
moneys  and  for  their  services  all 
the  bonds  and  shares  not  necessary 
for  the  acquisition  of  the  constituent 
breweries.  It  was  further  agreed 
that  if  by  March  1st,  1S99,  Sperry, 
Jones  &  Co.  had  procured  the  con- 
solidation of  breweries  with  an 
annual  output  of  at  least  560,000 
barrels,  Brehm  was  to  convey  his 
property  to  the  company  for  $1,- 
050,000  payable  $450,000  in  cash, 
$100,000  in  bonds  and  $500,000  In 
shares.  The  bill  of  complaint 
alleged  that  the  Maryland  Brew- 
ing Company  was  organized  upon 
the  consolidation  of  breweries  with 
a  total  annual  output  of  575,000 
barrels;  that  under  the  agreement 
between  Brehm  and  Sperry,  Jones 
&  Co.,  this  consolidation  would  have 
authorized  the  issuance  of  $6,175,- 


522 


THE  LAW  OF  PROMOTERS. 


from  the  corporation,  the  vendor  may  ordinarily  pursue  any  of  the- 
remedies  open  to  the  subscribers  in  general,  or  he  may,  if  the 
promoters'  unlawful  profits  were  taken  before  the  consummation 


000  in  bonds  and  $5,325,000  in 
shares,  while  there  was  actually 
issued  $7,303,000  in  bonds  and  $5,- 
550,000  in  shares,  making  an  over- 
issue of  $1,128,000  in  bonds  and 
$175,000  in  shares,  (it  may  be 
noticed  that  there  is  a  discrepancy 
in  the  figures)  and  that  as  a  result, 
the  shares  and  bonds  received  by 
the  plaintiff  as  part  payment  for 
his  brewery  property  were  ren- 
dered pro  tanto  less  valuable.  The 
complaint  asked  relief  that  Sperry, 
Jones  &  Co.  be  required  to  deliver 
up  to  the  Maryland  Brewing  Co. 
$1,128,000  of  bonds  and  $125,000  in 
shares,  and  that  if  they  had  not 
enough  of  said  bonds  and  shares 
in  their  possession,  that  they  pay 
to  the  Maryland  Brewing  Company 
either  the  par  value  thereof,  or  the 
highest  market  price  from  the  date 
of  issue  to  the  date  of  the  decree, 
as  might  be  most  advantageous  to 
the  company.  The  court  said  that 
it  was  not  clearly  perceived  to 
what  head  of  equity  jurisdiction 
the  case  presented  was  to  be  re- 
ferred; that  the  bill  was  not  in  the 
nature  of  one  to  enforce  a  trust 
by  the  plaintiff  as  a  stockholder  of 
the  Maryland  Brewing  Company 
but  was  essentially  one  to  enforce 
independent  individual  contractual 
rights  of  his  own,  growing  out  of  a 
contract  that  antedated  the  cor- 
poration ;  that  it  was  true  that  it 
was  alleged  that  the  suit  was 
brought  for  the  benefit  of  "all 


the  corporations  and  individuals 
(owners  of  brewery  property) 
which  were  constituents  of  the  said 
corporation "  similarly  situated  as 
the  plaintiff,  but  that  the  contract, 
which  it  was  the  objpct  of  the  bill 
to  have  enforced,  was  made  with 
the  plaintiff  .individually,  and  not 
for  or  on  ebhalf  of  others,  and  that 
no  rights  were  secured  thereby  to 
others  than  the  immediate  contract- 
ing parties,  and  that  it  was  not  per- 
ceived how  in  a  suit  on  this  con- 
tract there  could  be  others  who 
should  have  such  community  of  in- 
terest with  the  plaintiff  as  to  be- 
come participants  with  him  in  the 
suit ;  that  the  suit  was  therefore  es- 
sentially the  individual  suit  of  the 
plaintiff,  and  must  be  so  treated. 
The  bill  of  complaint  seems,  if 
fairly  construed,  to  have  entitled 
the  plaintiff  to  relief.  The  plain- 
tiff under  his  contract  became  a 
subscriber  to  the  stock  of  the  com- 
pany. The  defendants  were  pro- 
moters of  the  corporation.  The 
contract  provided  that  the  total 
bonds  and  shares  to  be  issued  by 
the  corporation  to  be  formed  should 
be  $20  for  every  barrel  of  the  annual 
output  of  the  consolidated  brewer- 
ies, and  the  plaintiff  consented  that 
the  promoters  should  receive  for 
their  services,  and  for  the  $500,000 
of  working  capital  to  be  furnished 
by  them,  the  difference  between  the 
shares  and  bonds  so  authorized  to 
be  issued,  and  the  amount  of  the 


VENDORS.  523 

of  the  sale  and  the  value  of  the  shares  paid  to  the  vendor  was 
thereby  reduced,  rescind  the  sale  and  recover  his  property  from 
the  corporation.34 

§  293.  Rights  of  vendor  receiving  payments  in  bonds. 

If  a  person  selling  property  to  the  corporation  receives  pay- 
ment therefor  in  its  bonds,  he  may,  no  doubt,  rescind  the  sale  if  it 
subsequently  appears  that  the  securities  received  by  him  had, 
because  of  the  fraud  of  the  promoters,  a  lesser  value  than  the 
securities  which  he  was  under  his  contract  entitled  to  receive.85 
The  vendor  may  also  pursue  such  other  remedies  as  are  generally 
open  to  corporate  bondholders.36 

In  Hooper  v.  Central  Trust  Company,37  the  plaintiffs-  sold 
certain  property  to  the  defendant  corporation  receiving  therefor 
$150,000  in  cash  and  $100,000  in  second  mortgage  bonds  sub- 
ordinate to  an  issue  of  $250,000  first  mortgage  bonds  taken  and 
held  by  the  promoters.  The  vendee  corporation  agreed  with  the 
plaintiffs  to  construct  upon  the  property,  certain  ice  manu- 
facturing machinery  to  the  value  of  $130,000  to  $150,000.  The 

shares  and  bonds  needed  to  pay  for  reargument  denied,  185  N.  Y.  620, 
the     brewery    properties    acquired.  78  N.  E.  1099,  explained  in  Old  Do- 
When  the  defendant  promoters  re-  minion  Copper,  etc.,  Co.  v.  Bigelow, 
ceived    more   than    the    bonds    and  203  Mass.  159,  175,  89  N.  E.  193,  40 
shares  to  which  they  were  entitled  L.  R.  A.  N.  S.  314. 
under    their    agreement    with    the  34.  A.    J.    Cranor   Co.    v.    Miller, 
plaintiff,    they    took    an    unlawful  147     Ala.     268,     41     So.    678;     cf. 
profit   of   which    the   plaintiff   was,  Brehm   v.   Sperry,  Jones  &  Co.,  92 
as  a  minority  stockholder,  entitled  Md.  378,  48  Atl.  368. 
to  complain.     The  same  transaction  35.  See,  though  the  question  was 
was  involved  in  the  action  of  Tomp-  not  there  involved,  Minister  of  Rail- 
kins  v.  Sperry,  Jones  &  Co.,  96  Md.  ways  and  Canals  v.  Quebec  Southern 
560,   54   Atl.    254,    where   the   com-  Railway  Co.,  12  Exch.  Rep.  of  Can. 
plaint  of  the  receiver  of  the  Mary-  11,  24. 
land  Brewing  Co.  against  the  pro-  36.  See  ante,  §  189. 
moters  was  dismissed.  37.  81  Md.  559,  32  Atl.  505,  29  U 
Compare    also     Blum     v.     Whit-  R.   A.   262.     Cited   in   Tompkins   v. 
ney,  185  N.  Y.  232,  77  N.  E.  1159,  Sperry,  Jones  &  Co.,  96  Md.  500,  54 

Atl.  254. 


524  THE  LAW  OF  PROMOTERS. 

promoters  personally  guaranteed  the  construction  of  these  im- 
provements and  represented  to  the  plaintiff  that  the  vendee  cor- 
poration had  deposited  with  them,  funds  to  pay  therefor.  This 
representation  was  false,  and  the  contractor,  not  having  been  paid, 
instituted  suit  and  impressed  a  lien  upon  the  machinery.  The 
promoters  paid  the  contractor  and  received  an  assignment  of  his 
judgment.  The  promoters  attempted  to  enforce  their  rights  as 
holders  of  the  first  mortgage  bonds  and  as  assignees  of  the  con- 
tractor's judgment,  claiming  priority  over  the  plaintiffs  as  hold- 
ers of  the  second  mortgage  bonds.  The  court  held  that  the 
plaintiffs  had  been  induced  to  accept  a  subordinate  lien  by  the 
promoters'  guarantee  that  the  property  would  be  improved  as 
agreed  and  by  their  false  representation  that  the  corporation 
had  deposited  with  them  funds  to  pay  therefor;  that  the  con- 
tractor's decree  which  had  been  assigned  to  the  promoters,  was 
for  the  very  purchase  moneys  which  the  promoters  had  falsely 
represented  to  be  deposited  with  them ;  that  it  would  be  inequitable 
to  allow  these  claims  priority,  and  that  the  first  mortgage  bonds 
and  the  decree  should  both  be  subordinated  to  the  second  mortgage 
bonds  held  by  the  plaintiffs. 

§  294.  Rights  of  persons  donating  lands  to  the  corporation. 

In  Moore  v.  Universal  Elevator  Co.,38  Moore,  one  of  the  pro- 
moters and  afterwards  the  president  of  the  defendant  corporation, 
induced  certain  persons  to  donate  lands  and  moneys  for  the 
erection  of  the  proposed  plant,  Moore  agreeing  that  $75,000  of 
the  proposed  $100,000  capital  of  the  company  should  be  sub- 
scribed within  ten  days.  The  company  issued  shares  of  the  par 
value  of  $63,250  in  payment  for  property  of  little,  if  any,  value. 
The  company  being  unable  to  sell  its  shares,  Moore  advanced 
moneys  to  it  from  time  to  time  and  endorsed  its  notes,  which  he 
was  ultimately  compelled  to  pay.  The  company,  in  order  to  se- 
cure its  indebtedness  to  Moore,  gave  him  a  deed  of  its  factory 

38.  122  Mich.  48,  80  N.  W.  1015. 


VENDORS.  525 

building  and  lands.  The  company  subsequently,  in  order  to  se- 
cure its  indebtedness  to  a  certain  Otto  Gas  Engine  Company, 
executed  to  one  Livingston  a  deed  of  the  same  property,  on  the 
understanding  that  the  property  should,  upon  the  organization 
thereof,  be  transferred  to  a  new  company  which  was  to  assume 
the  indebtedness  of  the  defendant  company  to  the  Otto  Company, 
and  to  issue  to  Livingston,  for  the  benefit  of  the  persons  who  had 
donated  the  lands  and  moneys,  shares  equal  to  the  donations  made 
by  them.  As  soon  as  Moore  learned  of  this  he  placed  his  deed 
on  record.  The  deed  to  Livingston  was  placed  on  record  the 
next  day  and  possession  taken  on  his  behalf.  Thereupon  Moore 
filed  his  bill  praying  that  his  lien  be  declared  superior  to  that  of 
Livingston  and  for  incidental  relief.  The  court  held  that  Moore's 
agreement  with  the  persons  making  the  donations  to  the  company, 
contemplated  bona  fide  subscriptions  for  $75,000  of  the  com- 
pany's stock,  and  that  it  was  Moore's  duty  to  examine  into  the 
character  and  value  of  the  property  transferred  to  the  company 
in  payment,  and  that  his  good  faith  was  immaterial;  that  the 
method  of  organization  of  the  defendant  company  was  a  fraud 
upon  the  persons  who  had  made  the  donations,  and  that  their  lien 
was  superior  to  that  of  Moore. 

§  295.  Relation  inter  se  of  persons  selling  property  to  the  cor- 
poration. 

If  the  several  owners  of  a  number  of  properties  enter  into 
agreements  with  the  promoters  for  the  transfer  of  their  respective 
properties  to  the  corporation  upon  what  are  considered  to  be 
identical  terms,  an  agreement  between  the  promoters  and  one  of 
the  vendors  to  give  to  such  vendor  some  secret  profit  or  advantage 
constitutes  a  fraud  upon  the  other  vendors  for  which  the  favored 
vendor  may  be  compelled  to  account.39  It  has,  however,  been 

39.  Boice  v.  Jones,  106  N.  Y.  App.      Shutts    v.    United    Box,    Board    & 
Div.   547,   94   Supp.   896.     See  also      Paper  Co.,  67  N.  J.  Eq.  225,  58  Atl. 

1075. 


526  THE  LAW  OF  PROMOTERS. 

held  that  the  impropriety  of  such  an  agreement  does  not  pre- 
vent its  enforcement  against  the  promoters.40 

It  has  been  held  that  a  false  representation  by  the  vendor  re- 
lating to  the  property  which  he  is  selling  to  the  corporation  is 
an  injury  to  the  corporation,  and  does  not  give  rise  to  an  action 
by  the  other  vendors.41 

40.  Boice  v.  Jones,  106  N.  Y.  App.  cases  cited,  ante,  §  288,  note  21,  ana 

Div.   547,   94   Supp.   898.     See  also  see  ante,  §  256. 

Boice  v.  Jones.  86  N.  Y.  App.  Div,          41.  Beatty  v.  Neelon,  13  Can.  S. 

613,  83  Supp.  230.    Of.,  however,  the  C.  1,  19  Am.  &  Eng.  Corp.  Cas.  236. 


CHAPTER  XVH. 

OF  THE  RIGHTS  AND  LIABILITIES  OF  PROMOTERS  INTER  SE. 

Section  296.  Fiduciary  relation  of  promoters  to  each  other. 

297.  Liability  of  promoter  carrying  out  proposed  plan  to  exclusion 
of  co-promoter. 

298.  The  same  subject. — Promoter  carrying  out  plan  after  rights 
under  original  plan  have  lapsed. 

299.  The  same  subject. — No  property  right  in  mere  idea. 

300.  The  same  subject. — Rights  in  corporate  charter  obtained  by 
co-promoter. 

301.  Frauds  of  promoters  upon  one  another  as  basis  of  action  by 
corporation. 

302.  Promoters  not  partners. 

303.  Liability  in  solido. 

304.  Joint  liability  of  promoters  in  case  of  rescission. 

305.  Contribution  between  promoters. 

306.  Promoter's  liability  for  compensation  of  co-promoter. 

§  296.  Fiduciary  relation  of  promoters  to  each  other. 

Promoters  occupy  a  fiduciary  relation  toward  each  other,1  and 
any  promoter  who  obtains  for  himself  any  secret  advantage  over 
his  co-promoters,  may  be  compelled  to  account  to  them  therefor.2 

1.  Cortes  Co.  v.  Thannhauser,  45  followed  in  137  N.  Y.  App.  Div.  899, 

Fed.     Rep.     730,     739;     Krohn     v.  122  Supp.  1131,  which  is  reversed 

Williamson,  62  Fed.  Rep.  869,  877.  in  203  N.  Y.  210,  96  N.  E.  441. 
affirmed,    sub    nom.    Williamson    v.          Beck  v.   Kantorowicz,  3   K.  ft  J. 

Krohn,  66  Fed.  Rep.  655,  13  C.  C.  230;   but   see  Thames  Nav.   Co.   v. 

A.  668,  31  U.  S.  App.  325.  Reid,  9  Ont.  754,  762,   (reversed  on 

De    La    Motte    v.    Northwestern  another  ground,  13  Ont.  App.  303), 

Clearance  Co.,  126  Minn.  197,  148  N.  and  Garvin  v.  Edmondson,  14  Ont. 

W.  47.  W.  R.  435,  appeal  dismissed,  15  Ont. 

Heckscher  v.  Edenborn,  131  N.  Y.  W.  R.  210. 

App.  Div.  253,  259,  115  Supp.  673,  is         2.  Williamson  v.  Krohn,  66  Fed. 

(627) 


528  THB  LAW  OF  PROMOTERS. 

§  297.  Liability  of  promoter  carrying  out  proposed  plan  to  the 
exclusion  of  co-promoter. 

It  frequently  happens  that  a  promotion  jointly  undertaken  by 
a  number  of  promoters,  is  actually  carried  out  in  an  identical  or 
similar  form  by  some  of  the  original  promoters  to  the  exclusion 
of  others,  and  questions  as  to  the  rights  of  the  excluded  promoters 
necessarily  arise.  Promoters  joining  in  the  organization  of  a 
company  stand  in  a  relation  of  trust  and  confidence  toward  each 
other,  and  are  bound  in  good  faith  to  carry  out  their  agreement 
for  the  joint  benefit  of  all  concerned.  If  any  of  them,  while  the 
promotion  is  pending,  and  in  violation  of  their  agreement,  con- 
summate the  transaction  for  their  own  benefit  excluding  some  of 
their  associates,  they  may  be  compelled  to  pay  to  the  latter  their 
stipulated  share  of  the  promotion  profits. 

In  Sun  Dance  Gold  Mining  Co.  v.  Frost,3  the  plaintiff  had  en- 
tered into  a  contract  in  writing  for  the  purchase  of  certain  min- 
ing property  in  Arizona,  the  deed  of  which  was  to  be  placed  in 
escrow  to  be  delivered  upon  payment  of  the  purchase  price,  the 
contract  containing  a  provision  for  forfeiture  in  case  of  non- 
payment. Thereafter  the  plaintiff  agreed  with  one  Davies  that 
they  would  jointly  make  the  payments.  The  plaintiff  and  Davies 
then  caused  the  defendant  corporation  to  be  organized  to  take 
over  the  property.  Davies,  after  arranging  with  the  vendor  that 

Rep.   655,   13   C.   C.    A.   668,   31   TJ.  Travis  v.  Travis,  140  N.  Y.  App.  Div. 

S.    App.    325,    affirming,    Krohn    v.  191,  124  Supp.  1021. 

Williamson,  62  Fed.  Rep.  869;  Mat-  A  promoter  who  commits  a  fraud 

tern  v.   Canavan,  3  Cal.   App.  493,  upon   the   members  of  a    syndicate 

86  Pac.  618;  Emery  v.  Parrott,  107  formed  to  purchase  property  to  be 

Mass.  95;  Botsford  v.  Van  Riper,  33  resold   to   the   corporation   may   be 

Nev.  156,  110  Pac.  705.  made  to  account  to  the  syndicate, 

If  the  profit  in  question  is  the  re-  (Mississippi   Lumber   Co.    v.    Joice, 

suit  of  a  fraud  upon  other  and  in-  176  111.  App.  110,  118,  119),  and  in 

nocent  parties,  an  accounting  to  the  some  cases  to  the  corporation.     See 

co-promoters   will   not   be   directed,  post,  §  301. 

See  Primeau  v.  Granfleld,  193  Fed.  3.  7  Ariz.  289,  64  Pac.  435. 
Rep.  911,  114  C.  C.  A.  549 ;  and  see 


PROMOTERS  INTER  SB.  529 

the  property  should  be  sold  to  him  in  case  the  second  payment 
upon  the  existing  contract  should  not  be  met,  falsely  represented 
to  the  plaintiff  that  an  extension  of  time  for  the  making  of  this 
second  payment  had  been  obtained.  The  plaintiff  relying  on  this 
representation  did  not  make  the  second  payment  and  his  contract 
was  thereupon  forfeited.  Davies  then  procured  a  new  contract 
and  transferred  the  property  to  the  defendant  corporation, 
thereby  gaining  a  personal  profit  of  400,000  shares.  The  court 
held  that  the  plaintiff  was  entitled  to  a  half  interest  in  the  con- 
tract procured  by  Davies  and  one-half  of  the  profit  resulting 
therefrom,  and  that  as  the  company  had  full  knowledge  of  the 
situation,  the  plaintiff  was  entitled  to  judgment  against  both  it 
and  Davies  for  the  value  of  200,000  shares. 

§  298.  The  same  subject. — Promoter  carrying  out  plan  after 

rights  under  original  plan  have  lapsed. 

In  Gillett  v.  Dodge,4  the  promoters  joined  in  the  purchase  of 
an  option,  organized  a  corporation,  and  issued  its  entire  capital 
stock  to  themselves  in  payment  for  such  option.  A  certain 
portion  of  the  shares  was  thereupon  donated  to  the  treasury, 
to  be  sold  for  the  benefit  of  the  company.  The  parties  were  un- 
able to  sell  these  shares,  and  the  corporation,  having  no  funds, 
the  option  was  allowed  to  expire.  Thereafter  the  defendant  pro- 
moter purchased  the  property  on  his  own  account.  The  plaintiff 
promoter  brought  suit,  asking  that  it  be  adjudged  that  the  title 
to  the  property  was  held  by  the  defendant  as  trustee  for  the  cor- 
poration. The  court  gave  judgment  for  the  defendant  on  the 
ground  that  he  was  under  no  obligation  to  take  up  the  option  for 
the  benefit  of  the  corporation  with  his  own  funds,  and  that,  the 
original  option  having  expired,  either  of  the  parties  was  at 
liberty  to  purchase  the  property  for  his  individual  account. 

4.  50  Or.  552,  89  Pac.  741.     And       (N.  Y.)  612,  24  Supp.  588. 

see    Sessions    v.     K I  well,    71    Hun 


530  THE  LAW  OF  PROMOTERS. 

In  Parks  v.  Gates,5  the  parties  had  entered  into  an  agreement 
for  the  formation  of  a  combination  of  the  wire  manufactories  of 
the  United  States.  Under  the  terms  of  the  agreement  J.  P.  Morgan 
&  Company  were  to  finance  the  scheme,  that  firm  reserving  the 
right  to  refuse  to  carry  out  the  contract  if,  upon  investigation  of 
the  properties  to  be  acquired,  they  found  the  scheme  unsatis- 
factory. J.  P.  Morgan  &  Company,  after  examining  the  prop- 
erties, refused  to  have  any  further  connection  with  the  enter- 
prise which  was  thereupon  abandoned.  Thereafter  soiree  of  the 
other  parties  formed  the  American  Steel  &  Wire  Company  of 
Illinois,  made  up  of  five  of  the  fourteen  companies  mentioned  in 
the  Morgan  agreement,  and  later  organized  the  American  Steel  & 
Wire  Company  of  New  Jersey.  The  court  held  that  the  relation 
of  the  parties  was  not  that  of  co-partners  and  while  it  partook 
of  that  relation  and  became  subject  to  the  rule  requiring  absolute 
good  faith,  yet  the  scheme  had,  by  reason  of  existing  conditions, 
proved  abortive  and  been  abandoned;  that  the  parties  were  there- 
upon remitted  to  their  former  condition,  and  each  was  at  liberty 
to  avail  himself  of  any  benefits  resulting  from  the  negotiations 
which  had  been  had,  and  the  conditions  which  had  been  produced 
under  the  abandoned  contract. 

In  Schantz  v.  Oakman,6  the  complaint  alleged  that  the  plain- 
tiff having  an  option  for  the  purchase  of  the  majority  of  the 
stock  of  certain  street  railway  companies  in  Milwaukee,  entered 
into  an  agreement  with  the  defendants  Oakman  and  Ryan,  the 
owners  of  the  majority  of  the  stock  of  the  Milwaukee  City  Rail- 
way Company,  to  form  a  new  company,  to  be  known  as  the  Con- 
solidated Company,  for  the  purpose  of  taking  over  the  companies 
mentioned.  The  plaintiff  alleged  that  the  defendants  did  not 
organize  the  Consolidated  Company  in  accordance  with  their 
agreement,  but,  on  the  contrary,  joined  with  the  other  defendants 

5.  84  N.  Y.  App.  Div.  534,  82  Supp.          6.  163  N.  Y.  148,  57  N.  E.  288,  af- 
1070.  firming,  10  N.  Y.  App.  Div.  151,  41 

Supp.  746,  75  St.  Rep.  1140. 


PROMOTERS  INTER  SE.  531 

in  the  formation  of  the  Milwaukee  Street  Railway  Company  of 
Wisconsin  to  which  they  transferred  the  common  stock,  property 
and  franchises  of  the  Milwaukee  City  Railway  Company ;  and  that 
the  defendants  by  reason  of  these  transactions  acquired  large 
profits.  The  plaintiff  demanded  judgment  for  an  accounting  as 
to  all  the  transactions  of  the  defendants,  to  the  end  that  the  profits 
received  by  the  defendants  Oakman  and  Ryan  might  be  ascer- 
tained, and  that  such  profits  should  be  adjudged  to  belong  to  the 
defendants  Oakman  and  Ryan  and  the  plaintiff  jointly.  The 
court,  however,  held  that  the  allegation  as  to  the  profits  made 
by  Oakman  and  Ryan  related  to  their  combination  and  adventure 
with  the  other  defendants  after  relations  with  the  plaintiff  had 
been  broken  off,  and  that,  if  the  plaintiff  had  a  cause  of  action, 
his  remedy  was  an  action  at  law  for  breach  of  contract-  against 
the  defendants  Oakman  and  Ryan. 

§  299.  The  same  subject. — No  property  right  in  a  mere  idea. 

In  Haskins  v.  Ryan,7  the  bill  of  complaint  alleged  that  the 
complainant  had  conceived  a  plan  of  combining  such  lead  interests 
in  the  United  States  as  had  not  already  become  a  part  of  the 
National  Lead  Company,  and  had  either  procured  options 
therefor  or  had  opened  negotiations  for  their  purchase;  that  he 
laid  such  plan  before  the  defendant,  who  expressed  a  willingness 
to  join  the  complainant,  provided  that  an  examination  of  the 
plan  confirmed  the  statements  made  by  him ;  that  the  United  Lead 
Company  was  thereupon  organized,  and  it,  under  the  direction 
ajid  control  of  the  defendant,  acquired  nearly  all  of  the  concerns 

7.  71  N.  3.  Eq.  575,  64  Atl.  436.  "  plans,  method  and  system  of  sell- 
See  Flaherty  v.  Cary,  62  N.  Y.  App.  ing  life  insurance  "  was  held  in  Fed- 
Div.  116,  70  Supp.  951,  affirmed  eral  Life  Insurance  Co.  v.  (Jriffin, 
without  opinion,  174  N.  Y.  550,  67  (173  111.  App.  5,  15),  a  sufficient 
N.  E.  1082.  consideration  for  the  corporation's 

An  agreement  of  the  promoter  to  agreement  to  pay  him  a  royalty, 
allow    the   corporation   to    use   his 


532  THE  LAW  OF  PROMOTERS. 

mentioned  in  the  complainant's  plan.  The  bill  charged  that  the 
act  of  the  defendant  in  thus  availing  himself,  to  the  exclusion  of 
the  complainant,  of  the  information  which  the  complainant  had 
disclosed  to  him  upon  the  understanding  that  the  defendant  would 
join  the  complainant  in  such  scheme  and  share  with  him  in  the 
profits  arising  therefrom,  was  contrary  to  equity.  The  bill  asked 
for  a  disclosure  and  account  of  the  defendant's  profits,  and  a  de- 
cree that  the  complainant  was  entitled  to  a  share  of  the  same. 
The  court  held  that  the  bill  of  complaint  showed  npthing  more 
than  an  agreement  of  the  parties  to  enter  into  a  definite  and  ex- 
plicit agreement  upon  the  subject,  that  such  an  agreement  was 
unenforceable,  and  that  the  complainant  could  not  recover  on  the 
ground  that  the  defendant  had  appropriated  his  plan  as  there 
is  no  such  thing  as  a  property  right  in  a  mere  idea. 

§  300.  The    same    subject. — Rights    in    corporate    charter    ob- 
tained by  co-promoter. 

In  Dobbins  v.  Peabody,8  it  appeared  that  the  Meigs  Elevated 
Railway  Company  and  others  as  parties  of  the  first  part  had  en- 
tered into  a  contract  with  the  defendants  providing,  in  substance, 
that  the  defendants  might  build  and  operate  elevated  railroads 
under  the  Meigs  System,  and  the  defendants  agreed  that  they 
would  assign  to  the  parties  of  the  first  part  25  per  cent  of  the 
capital  stock  of  any  corporation  organized  by  them  to  operate  a 
railroad  under  such  system  in  the  Commonwealth  of  Massachu- 
setts. The  defendants  obtained  from  the  legislature  of  the  Com- 
monwealth of  Massachusetts  a  special  act  incorporating  the  Bos- 
ton Elevated  Railway  Company,  but  instead  of  organizing  the 

8.  199  Mass.  141,  85  N.  E.  102,  and  over  the  charter  of  the  corporation 

see  Roosevelt  v.  Hamblin,  199  Mass,  that  he  promotes,  that  an  assign- 

127,  85  N.  E.  98,  18  L.  R.  A.  N.  S.  ment  to  the  corporation  of  the 

748.  "  right  to  use  the  charter  "  can  be 

It  is  held  in  Federal  Life  Ins.  Co.  considered  as  any  consideration  for 

v.  Griffin,  (173  111.  App.  5,  15),  that  a  promise  made  by  the  corporation, 
the  promoter  has  no  such  control 


PROMOTERS  INTER  8E.  533 

corporation  to  operate  an  elevated  railway  under  the  Meigs 
System  they  sold  the  charter  for  the  sum  of  $400,000.  The 
plaintiffs,  stockholders  of  the  Meigs  Elevated  Railway  Company, 
brought  suit  in  equity  to  compel  the  defendants  to  account  for  the 
proceeds  of  this  sale.  The  court  found  that  the  defendants  did 
not  obtain  the  charter  of  the  Boston  Elevated  Railway  Company 
pursuant  to  an  employment  by  the  stockholders  of  the  Meigs  Ele- 
vated Railway  Company;  that  the  defendants  obtained  the  char- 
ter in  their  own  right,  and  that  the  plaintiffs  had  no  interest 
therein. 

§  301.  Frauds  of  promoters  upon  one  another  as  basis  of  action 
by  corporation. 

It  has  in  a  few  cases  been  held  that  a  cause  of  action  accrues  to 
the  corporation  because  of  a  fraud  committed  by  one  promoter 
upon  his  fellow  promoters,  or  upon  a  syndicate  formed  to  join 
the  promoters  in  the  purchase  of  property  to  be  conveyed  to  the 
corporation.  This  can  in  no  case  be  so  unless  there  is  room  for 
the  inference  that  the  corporation  was,  because  of  the  fraud  com- 
plained of,  compelled  to  pay  an  increased  price  for  its  property, 
or  in  some  manner  injured  by  the  fraud. 

In  Beck  v.  Kantorowicz,9  the  defendant  Kantorowicz  had  repre- 
sented to  his  four  associates  that  certain  mining  concessions  in 
Germany  could  be  purchased  for  £85,714.  The  concessions  were 
thereupon  purchased,  the  preliminary  expenses  increasing  the 
cost  to  about  £95,000.  A  corporation  was  then  organized,  and 
the  concessions  sold  to  it  for  £125,000,  the  prospectus  stating 
that  this  price  included  a  premium  (the  amount  not  being  stated) 
to  the  parties  who  had  incurred  the  risk  and  responsibility  of  the 
original  purchase.  It  was  later  discovered  that  Kantorowicz  had 

9.  3  K.  &  J.  230,  244,  246.     Ap-  Am.  &  Eng.  Corp.  Cas.  236,  and  fol- 

proved  In  Beatty  v.  Neelon,  12  Ont  lowed  in  Alexandra  Oil  &  Dev.  Co. 

App.  50,  12  Am.  &  Eng.  Corp.  Cas.  v.  Cook,  11  Ont.  W.  R.  1054,  affirm- 

20,    affirmed,   13   Can.    S.   C.   1,    19  ing,  10  Ont  W.  R.  781. 


534  THE  LAW  OF  PROMOTERS. 

without  the  knowledge  of  his  fellow  promoters  received  a  bonus 
of  about  £20,000  from  the  original  vendor.  Suit  was  instituted 
on  behalf  of  the  company.  The  vice  chancellor  stated  that  he 
had  no  hesitation  in  saying  that  as  between  Kantorowicz  and  his 
four  co-purchasers  the  transaction  could  not  stand,  but  that  there 
was  a  question  of  some  nicety  as  to  how  far  Kantorowicz's  action 
could  be  deemed  a  fraud  upon  the  company,  the  latter  having  re- 
ceived exactly  what  it  bargained  for,  and  the  prospectus  having 
stated  that  a  premium  was  to  be  paid  to  the  promoters.  He  con- 
cluded, however,  that  the  company  had  been  injured,  reasoning 
that  the  promoters  had  fixed  upon  the  price  of  £125,000  to  the 
company  as  representing  £95,000  cost  to  them,  and  £30,000 
compensation  for  their  risk  and  responsibility  in  the  transaction, 
and  that  it  could  be  assumed  that  had  the  promoters  acquired 
the  property  for  £20,000  less,  they  would  not  have  increased  their 
compensation,  but  would  have  given  the  company  the  benefit  of 
the  lower  price. 

In  Ex-Mission  Land  and  Water  Company  v.  Flash,10  the  de- 
fendants having  purchased  a  tract  of  land  at  $5.05  per  acre,  en- 
tered into  a  "  Subscription  Contract "  with  a  number  of  other 
parties,  under  which  the  parties  agreed  to  purchase  the  property 
at  $25  per  acre.  The  plaintiff  corporation  was  then  organized^ 
the  property  transferred  to  it,  and  shares  issued  to  the  signers 
of  the  subscription  contract  in  proportion  to  their  agreed  interest 
in  the  land.  The  majority  of  the  subscribers  were  unaware  of 
the  defendants'  profits.  The  company,  upon  discovering  the 
facts,  brought  suit.  The  defendants  contended  that  the  fraud, 
if  any,  was  committed,  not  upon  the  company,  but  upon  the  indi- 
vidual subscribers  to  the  agreement  for  the  purchase  of  the  land. 
The  court  held  that  the  contract  was  not  in  a  proper  sense  a 
contract  for  the  purchase  of  land;  that  it  was  not  the  intention 

10.  97  Cal.  610,  32  Pac.  600.     See      71  N.  W.  81. 
also  Franey  v.  Warner,  96  Wis.  222, 


PROMOTERS  INTER  8E. 


535 


of  the  subscribers  to  purchase  the  land,  but  to  take  shares  in  the 
stock  of  the  corporation  which  should  purchase  the  land,  and  that 
the  action  was  properly  brought  by  the  corporation. 

In  Davis  v.  Las  Ovas  Co.,11  the  parties  agreed  that  a  syndi- 
cate formed  for  the  purpose,  should  purchase  certain  lands  in 
Cuba  for  the  sum  of  $35,000 ;  that  a  corporation  should  be  formed 
with  a  capital  stock  of  $150,000,  forty  per  cent  of  which  was  to  be 
issued  to  the  promoters  as  compensation  for  their  services,  and 
the  remainder  subscribed  for  at  an  amount  sufficient  to  cover  the 
purchase  price  of  $35,000  and  create  an  expense  fund  of  $5,000. 
It  afterwards  appeared  that  the  promoters,  before  the  organization 
of  the  syndicate,  had  secured  an  option  to  purchase  the  prop- 


11.  227  U.  S.  80,  33  Sup.  Ct.  197, 
57  L.  Ed.  426;  see  also  Edenborn  v. 
Sim,  206  Fed.  Rep.  275,  124  C.  C.  A. 
339 ;  Arnold  v.  Searing,  73  N.  J.  Eq. 
262,  265-266,  67  Atl.  831,  78  N.  J. 
Eq.  146,  78  Atl.  762.  Midwood 
Park  Co.  v.  Baker,  128  N.  Y. 
Supp.  954,  affirmed,  144  N.  Y.  App. 
Div.  939,  129  Supp.  1135,  affirmed, 
207  N.  Y.  675,  100  N.  E.  1130;  Alex- 
andra Oil  &  Dev.  Co.  v.  Cook,  11 
Ont.  W.  R.  1054,  affirming,  10  Ont. 
W.  R.  781. 

Cf.  Spaulding  v.  North  Milwaukee 
Town  Site  Co.,  106  Wis.  481,  81  N. 
W.  1064.  In  that  case  a  number 
of  persons  having  acquired  a  tract  of 
land  at  $1,300  an  acre,  arranged  to 
organize  a  corporation  to  take  over 
the  land  at  $1,500  an  acre.  Before 
the  corporation  was  organized, 
Meyer,  one  of  the  common  owners  of 
the  property,  sold  a  one-sixteenth  in- 
terest to  the  plaintiff  at  $1,325  an 
acre,  misrepresenting  to  him  that  the 
property  had  cost  that  price.  The 


court  held  that  the  injury  was  per- 
sonal to  the  plaintiff,  and  that  the 
corporation  had  no  right  of  action. 

The  fact  that  the  defrauded  syn- 
dicate in  turn  defrauded  the  cor- 
poration is  no  answer  to  a  complaint 
by  the  corporation  based  upon  the 
secret  profit  of  the  promoter.  See, 
ante,  §  141. 

It  is,  however,  held  in  New  York 
that  where  the  organizers  are  them- 
selves the  owners  of  all  the  property 
to  be  conveyed  to  the  cori>oration: 
and,  there  being  no  outside  sub- 
scribers, the  only  parties  interested 
either  as  sellers  or  buyers,  a  fraud 
by  one  of  the  organizers  upon  those 
associated  with  him,  gives  rise  to  a 
cause  of  action  in  the  individuals 
injured,  but  not  in  the  cori>oration. 
Blum  v.  Whitney,  185  N.  Y.  232, 
241-242,  77  N.  E.  1159,  reargument 
denied.  1X5  N.  Y.  620,  7S  N.  E.  1099; 
Flanagan  v.  Lyon.  54  N.  Y.  Misc. 
372,  105  Supp.  1049;  and  see  Meyer 
v.  Page,  112  N.  Y.  App.  Div.  625. 
634,  98  Supp.  739. 


536  THE  LAW  OF  PROMOTERS. 

erty  at  $20,000  and  caused  the  property  to  be  conveyed  to  a 
dummy  who  in  turn  conveyed  it  to  the  syndicate  at  $35,000.  The 
court  pointed  out  that  some  of  the  members  of  the  syndicate 
were  ignorant  of  the  real  price  which  was  paid  for  the  property, 
and  that  these  innocent  members  of  the  syndicate  became  stock 
subscribers  and  directors  of  the  company  as  did  the  promoters. 
The  court  held  that  those  of  the  syndicate  assuming  to  act  for 
the  corporation  in  acquiring  the  property  were  under  an  obliga- 
tion to  disclose  the  truth  and  deal  openly,  and  that  in  the  abj 
sence  of  such  disclosure  the  corporate  consent  was  obtained  on 
false  grounds.  "  The  wrong  was  done  when  those  members  of 
the  syndicate  not  in  complicity  with  appellants  (the  promoters) 
subscribed  to  the  stock  of  the  company  and  aided  their  guilty 
associate  managers  in  the  corporate  action  necessary  to  the  cor- 
porate acquisition  of  the  property  at  the  exaggerated  price 
placed  upon  it  by  those  who  were  to  realize  a  secret  profit.  Thus, 
the  original  fraud  practiced  upon  some  of  those  associated  with 
them  in  the  promoters'  arrangement  became  operatve  against 
"the  corporation  itself.  The  standing  of  the  corporation  results 
from  the  fact  that  there  were  innocent  and  deceived  members  of 
the  corporation  when  the  property  was  taken  over  by  it."  12 

§302.  Promoters  not  partners. 

The  mere  fact  of  being  co-promoters  of  the  same  corporation 
does  not  constitute  the  parties  partners.  As  long  as  their  rela- 
tion to  each  other  is  only  that  arising  out  of  their  common  rela- 
tionship to  the  corporation,  no  partnership  or  mutual  agency 
arises.13  They  are  not  liable  upon  each  other's  contracts,14  nor 

12.  The  court   distinguishes   Old  Arnold  v.  Northwestern  Telephone 
Dominion  Copper,  etc.,  Co.  v.  Lewi-  Co.,  199  111.  201,  65  N.  E.  224. 
sohn,  ante,  §  123.  Iowa. — Miller  v.  Baker,  161  Iowa 

13.  California. — See  Gray  v.  Bon-  136,  140  N.  W.  407. 

nell,  19  Cal.  App.  243,  125  Pac.  355.         Massachusetts. — Dole     v.     Wool- 

Ittinois. — Arnold    v.    Conklin,    96     dredge,  135  Mass.  140. 
HI.    App.   373,   reversed,   sub   nom.         Minnesota. — Roberts   Mfg.   Co.   v. 


PROMOTERS  INTER  SB, 


537 


are  they  liable  for  each  other's  frauds.15  If,  however,  as  is  fre- 
quently the  case,  the  promoters  join  not  only  in  the  promotion  of 
the  corporation,  but  in  the  sale  to  it  of  their  common  property, 


Schlick,  62  Minn.  332,  64  N.  W.  826 ; 
same  v.  Wright,  62  Minn.  337,  64  N. 
W.  827. 

Missouri. — Hornblower  v.  Cran- 
dall,  7  Mo.  App.  220,  231,  affirmed 
on  opinion  below,  78  Mo.  581 ;  Rail- 
road Gazette  v.  Wherry,  58  Mo.  App. 
423. 

New  York. — Schantz  v.  Oakman, 
163  N.  Y.  148,  156,  57  N.  E.  288; 
Parks  v.  Gates,  84  App.  Div.  534, 
540,  82  Supp.  1070. 

United  Kingdom  and  Colonies. — 
Reynell  v.  Lewis,  15  M.  &  W.  517, 
528-529;  Batard  v.  Douglas,  2  E.  & 
B.  287;  Bailey  v.  Macaulay,  13  Q. 
B.  (Ad.  &  El.  N.  S.)  815;  Wyld  v. 
Hopkins,  15  M.  &  W.  517;  Barker 
v.  Stead,  3  C.  B.  946;  Hamilton  v. 
Smith,  5  Jur.  N.  S.  32;  Capper's 
Case,  1  Sim.  N.  S.  178,  180;  Hung 
Man  v.  Ellis,  3  Brit.  Col.  486;  Wil- 
kins  v.  Da  vies,  16  Viet.  L.  R.  70; 
Wilson  v.  Hotchkiss,  2  Ont.  L.  R. 
261,  269-270,  (affirmed,  awft  nom. 
Milburn  v.  Wilson,  31  Can.  S.  C. 
481),  and  authorities  cited;  For- 
rester v.  Bell,  10  Ir.  L.  R.  555. 

Cf.  Boulter  v.  Peplow,  9  C.  B.  493. 

See  Burdick  on  Partnership,  (2nd 
ed.),  p.  35;  Lindley  on  Partnership, 
(8th  ed.),  pp.  19-21.  Note  to 
Brotherton  v.  Gilchrist,  115  Am.  St. 
Rep.  419. 

The  earlier  cases  of  Holmes  v. 
Higgins,  1  B.  &  C.  74;  Goddard  v. 
Hodges,  L.  J.  2  Exch.  N.  S.  20,  and 
Lucas  v.  Beach,  4  Jur.  631,  1  M.  & 


G.  417,  1  Scott  N.  R.  350,  are  over- 
ruled. 

14.  See  ante,  §  77,  and  see  post,  § 
316. 

As  to  the  right  of  a  promoter 
to  bind  his  co-promoter  by  a  modifi- 
cation of  their  contract  for  com- 
pensation, see  Gray  v.  Bonnell,  19 
Cal.  App,  243,  125  Pac.  355. 

15.  Second     National     Bank     v. 
Greenville  Screw-Point  Steel  Fence 
Post  Co.,  23  Ohio  C.  C.  274,  282; 
Spaulding     v.      North      Milwaukee 
Town  Site  Co.,  106  Wis.  481,  81  N. 
W.  1064;  Petrie  v.  Guelph  Lumber 
Co.,  11  Can.  S.  C.  450,  15  Am.  &  Eng. 
Corp.  Gas.  487 ;  Cargill  v.  Bower,  L. 
R.   10  Ch.   Div.   502.     See   perhaps 
New    Sombrero    Phosphate    Co.    v. 
Erlanger,  L.  R.  5  Ch.  Div.  73,  118, 
25   W.    R.   436,   affirmed,   sub  nom. 
Erlanger    v.   New   Sombrero   Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65. 

Participation  in  the  fraud  must  be 
fairly  proved  by  the  evidence;  cir- 
cumstances creating  a  suspicion  are 
not  sufficient.  Second  National 
Bank  v.  Greenville,  etc.,  Co.,  23 
Ohio  C.  C.  274. 

As  to  the  necessity  in  pleading,  of 
connecting  each  defendant  promoter 
with  the  fraud,  and  as  to  the  inter- 
pretation of  such  allegations  of  the 
complaint,  see  Pietsch  v.  Kraase,  112 
Wis.  418,  88  N.  W.  223,  and  Clarke 
v.  Mercantile  Trust  Co.,  110  N.  Y. 
App.  Div.  901,  95  Supp.  1118. 


538 


THE  LAW  OF  PROMOTERS. 


or  in  some  other  scheme  to  obtain  a  personal  profit  for  themselves, 
they  become,  if  not  partners,  at  least  parties  to  a  joint  venture, 
a  relationship  akin  to  that  of  partners.16  The  promoters  are  in 
such  case  liable  for  each  other's  acts  done  in  furtherance  of  the 
joint  venture,  and  may  be  held  liable  for  the  frauds  of  their  co- 
promoters  though  committed  without  their  authority  or  knowl- 
edge.17 


16.  Federal. — Chandler  v.  Bacon, 
30  Fed.  Rep.  538. 

California. — Mattern  v.  Canavan, 
3  Gal.  App.  493,  86  Pac.  618. 

Illinois. — Maxwell  v.  McWilliams, 
145  111.  App.  155,  176. 

Kentucky. — Friedman  v.  Janssen, 
23  Ky.  L.  R.  2151,  66  S.  W.  752. 

Maryland. — Hooper  v.  Central 
Trust  Co.,  81  Md.  559,  585,  32  Atl. 
505,  29  L.  R.  A.  262,  270. 

Missouri. — Hornblower  v.  Cran- 
dall,  7  Mo.  App.  220,  affirmed  on 
opinion  below,  78  Mo.  581. 

Nevada. — Botsford  v.  Van  Riper, 
33  Nev.  156,  110  Pac.  705. 

New  York.— Getty  v.  Devlin,  54 
N.  Y.  403,  413 ;  Downey  v.  Finucane, 
205  N.  Y.  261,  98  N.  E.  391,  40  L. 
R.  A.  N.  S.  307;  Watkins  v.  Dela- 
hunty,  133  App.  Div.  422,  117  Supp. 
885. 

Pennsylvania. — Simons  v.  Vulcan 
Oil  &  Mining  Co.,  61  Pa.  202,  219, 
220-221,  222,  100  Am.  Dec.  628; 
Burns  v.  McCabe,  72  Pa.  309,  315; 
Crow  v.  Green,  111  Pa.  637,  5  AtL 
23. 

Tennessee. — Pearsall  v.  Tenn.  Cen. 
tral  Ry.  Co.,  2  Tenn.  Ch.  App.  682, 
712. 

Utah. — Tanner  v.  Sinaloa  Land  & 
Fruit  Co.,  43  Utah  14,  134  Pac.  586. 

United  Kingdom  and  Colonies. — 
New  Sombrero  Phosphate  Co.  v. 


Erlanger,  L.  R.  5  Ch.  Div.  73,  117, 
118,  25  W.  R.  436,  affirmed,  sub  nom. 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218,  6 
Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65 ;  see  Howard  Stove 
Mfg.  Co.  v.  Dingman,  10  Ont.  Week. 
Rep.  127. 

Cf.  Miller  v.  Baker,  161  Iowa  136, 
140  N.  W.  407. 

17.  Ex-Mission  Land  &  Water  Co. 
v.  Flash,  97  Cal.  610,  32  Pac.  600; 
Getty  v.  Devlin,  54  N.  Y.  403,  413; 
Brewster  v.  Hatch,  122  N.  Y.  349, 
361,  25  N.  E.  505,  33  N.  Y.  St.  Rep. 
527 ;  New  Sombrero  Phosphate  Co. 
v.  Erlanger,  L.  R.  5  Ch.  Div.  73,  104- 
105,  25  W.  R.  436,  affirmed,  sub  nom. 
Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  L.  R.  3  App.  Cas.  1218, 
6  Eng.  Rul.  Cas.  777,  39  L.  T.  N.  S. 
269,  27  W.  R.  65;  and  see  Downey 
v.  Finucane,  205  N.  Y.  251,  98  N.  E. 
391,  40  L.  R.  A.  N.  S.  307.  See  also 
ante,  §  204. 

The  declarations  of  one  promoter 
are  in  such  case  evidence  against  his 
partners  in  the  venture.  Ashmead 
v.  Colby,  26  Conn.  287;  Miller  v. 
Barber,  66  N.  Y.  558,  567;  Simons 
v.  Vulcan  Oil  &  Mining  Co.,  61  Pa. 
202,  219,  100  Am.  Dec.  628;  Burns 
v.  McCabe,  72  Pa.  309,  315 ;  Pearsall 
v.  Tenn.  Central  Ry.  Co.,  2  Tenn. 
Ch.  App.  682,  712. 


PROMOTERS  INTER  SB. 


§303.  Liability  in  solido. 

Promoters  who  join  in  committing  a  fraud  upon  the  corpora- 
tion are  joint  tort  feasors  and  liable  in  solido  for  the  damage 
done  to  it.18 

It  has  frequently  been  said  that  promoters  who  join  in  a  con- 
spiracy to  secure  unlawful  profits  from  the  corporation  are  jointly 
and  severally  liable  to  account  to  it  for  the  full  amount  of  such 
profits,  regardless  of  the  proportion  thereof  received  by  each  of 
them.19  There  are,  however,  a  number  of  cases  in  which  this  doc- 
trine seems  to  be  disregarded. 

In  Bagnall  v.  Carlton,20  the  trustees  of  the  estate  of  James 


18.  Old  Dominion  Copper,  etc.,  Co. 
v.   Bigelow,  203  Mass.   159,  201,  89 
N.   E.   193,  40  L.   R.   A.   N.   S.  314, 
and    cases    cited;    Bigelow    v.    Old 
Dominion  Copper,  etc.,  Co.,  225  U.  S. 
Ill,  132,  32  Sup.  Ct.  641,  56  L.  Ed. 
1009,  Am.  &  Eng.  Ann.  Cas.,  1913  E. 
875;  Old  Dominion  Copper,  etc.,  Co. 
v.  Bigelow,  188  Mass.  315,  329,   74 
N.  E.  653,  108  Am.  St.  Rep.  479,  and 
cases     cited ;     Limited     Investment 
Association  v.  Glendale  Investment 
Association,  99  Wis.  54,   74  N.  W. 
633.    And  see  ante,  §  190,  also  §  139. 

It  is  held  in  Mississippi  Lumber 
Co.  v.  Joice,  (176  111.  App.  110,  121), 
that  any  person  who,  with  knowl- 
edge of  the  facts,  receives  a  share 
of  the  promoter's  unlawful  profits, 
is  liable  therefor.  See  also  ante, 
§5. 

19.  Federal. — Chandler  v.  Bacon, 
30  Fed.  Rep.  538. 

California. — L  o  m  i  t  a  Land  & 
Water  Co.  v.  Robinson,  154  Cal.  36, 
51-52,  97  Pac.  10,  18  L.  R.  A.  N.  S. 
1106,  1133-1134. 


Illinois. — Maxwell  v.  McWilliams, 
145  111.  App.  155,  176. 

Massachusetts. — Emery  v.  Parrott, 
107  Mass.  95. 

New  York.— Getty  v.  Devlin,  70 
N.  Y.  504,  511. 

Wisconsin. — F  o  u  n  t  a  i  n  Spring 
Park  Co.  v.  Roberts,  92  Wis.  345, 
349,  66  N.  W.  399,  400,  53  Am.  St 
Rep.  917;  Zinc  Carbonate  Co.  v. 
First  National  Bank,  103  Wis.  125, 
135,  79  N.  W.  229,  232,  74  Am.  St 
R.  845;  Spaulding  v.  North  Mil- 
waukee Town  Site  Co.,  106  Wis.  481, 
498,  81  N.  W.  1064,  1069. 

United  Kingdom  and  Colonies. — 
Gluckstein  v.  Barnes,  1900,  App.  Cas. 
240,  248,  affirming,  In  re  Olympia, 
Ltd.,  1898,  2  Ch.  Div.  153,  165,  173 ; 
In  re  Carriage  Co-operative  Supply 
Association,  L.  R.  27  Ch.  Div.  322; 
Alexandra  Oil  &  Development  Co.  v. 
Cook,  10  Ont  W.  R.  781,  affirmed, 
11  Ont.  W.  R.  1054. 

20.  L.  R.  6  Ch.  Div.  371,  385,  390, 
409.  See  also  Stratford  F.  I.  C.  &  C. 
Co.  v.  Mooney,  21  Ont  L.  R.  426, 
445. 


540  THE  LAW  OF  PROMOTERS. 

Bagnall,  wishing  to  sell  certain  collieries  and  iron  works  of  the 
estate,  and  the  life  tenant  Richard  Bagnall  having  promised 
Messrs.  Duignan  &  Lewis,  the  solicitors  of  the  estate,  a  commis- 
sion if  they  would  find  a  purchaser,  these  solicitors  put  themselves 
into  communication  with  one  Richardson,  who  introduced  them  to 
one  Carlton,  and  the  solicitors  on  behalf  of  the  trustees  arranged 
with  Carlton  that  he  should  organize  a  stock  company  to  pur- 
chase the  collieries  and  business  for  £290,370,  Carlton  to  re- 
ceive a  commission  of  £85,000  if  he  succeeded,  and  to  pay  £20,000 
as  liquidated  damages  if  he  failed.  Carlton  induced  the  defendant 
Grant  to  join  with  him  in  the  enterprise,  upon  the  understanding 
that  Grant  should  assume  the  entire  risk  of  the  transaction  and 
should  receive  £65,000  out  of  the  agreed  commission  of  £85,000, 
and  that  Carlton  should  receive  the  other  £20,000  out  of  which 
he  was  to  pay  Richardson  £10,000.  The  company  was  organized 
and  Grant  in  order  to  induce  W.  S.  Naylor  and  J.  Naylor,  trus- 
tees of  the  estate  of  James  Bagnall  (the  vendors)  to  become  di- 
rectors, gave  to  each  of  them  a  debenture  bond  of  £500.  All 
these  persons  were  held  to  be  promoters.  The  company  upon  dis- 
covery of  the  facts  brought  suit  to  recover  the  secret  commission 
of  £85,000.  The  court  held  that  the  defendants  Carlton  and 
Grant  were  jointly  liable  for  the  sum  of  £85,000,  that  Richardson 
was  liable  for  £10,000,  and  that  the  defendants  J.  Naylor  and  the 
personal  representatives  of  the  estate  of  W.  S.  Naylor  were  liable 
for  the  sum  of  £500,  each. 

Simons  v.  Vulcan  Oil  &  Mining  Co.21  was  an  action  to  recover 
from  the  two  individual  defendants  the  amount  of  the  unlawful 
profits  gained  by  them  upon  the  promotion  of  the  defendant  cor- 
poration. The  court  said  that,  in  order  to  recover  against  these 
two  defendants  in  an  action  of  assumpsit,  it  was  necessary  to 
show  that  the  profits  had  been  received  by  both  of  them ;  that  the 
promoters  were,  however,  jointly  interested  in  the  proceeds  of 

21.  61  Pa.  202,  222,  100  Am.  Dec.  628. 


PROMOTERS  INTER  SE. 

the  transaction ;  and  the  receipt  of  the  moneys  by  one  was  held  sus- 
ceptible of  sustaining  the  inference  that  such  money  was  received 
for  the  benefit  of  his  copartner  as  well  as  himself  and  threw  upon 
the  latter  the  burden  of  establishing  a  different  state  of  facts. 

It  is  said  in  Langdon  v.  Fogg  22  that  if  the  defendant  promoters 
unlawfully  obtain  and  divide  among  themselves  a  part  of  the  stock 
of  the  corporation,  and  it  is  sought  to  make  them  account  for 
the  profits  received  by  them  on  the  sale  of  such  stock,  but  it  is  not 
alleged  that  the  shares  were  taken  or  sold  for  the  joint  use  or 
profit  of  the  defendants,  each  defendant  can  only  be  held  liable 
to  account  for  the  profit  individually  made  by  him  upon  the  sale 
of  his  shares. 

Three  recent  cases  in  the  courts  of  New  Jersey  have  left  the  law 
of  that  state  in  great  uncertainty. 

In  Loudenslager  v.  Woodbury  Heights  Land  Co.,23  one  Roe 
was  the  owner  of  a  farm  and,  desiring  to  sell  it,  conceived  the  idea 
of  obtaining  options  for  the  purchase  of  several  adjoining  tracts, 
believing  that  the  market  value  of  the  whole  would  thereby  be 
enhanced.  Being  able  to  obtain  some,  but  not  all,  of  the  options, 
he  called  upon  the  defendant  Loudenslager  to  aid  him,  agreeing  to 
divide  with  Loudenslager  whatever  profit  might  be  made  out  of 
the  sale  of  the  entire  tract.  Pending  the  transaction  Roe,  to 
avoid  the  lien  of  a  judgment,  transferred  his  options  and  his  own 
farm  to  Loudenslager.  Roe,  Loudenslager  and  others  then  or- 
ganized the  complainant  company  and,  when  a  price  had  been 
agreed  upon,  the  lands  were  conveyed  to  Loudenslager  and  by  him 
conveyed  to  the  company.  An  action  was  brought  against 
Loudenslager,  to  which  Roe  was  not  a  party,  and  judgment  en- 
tered against  Loudenslager  for  the  entire  profits  of  the  trans- 
action. An  appeal  was  taken  to  the  Court  of  Errors  and  Ap- 
peals, and  the  judgment  below  affirmed  by  an  evenly  divided  court. 

22.  18  Fed.  Rep.  5.  56  N.  J.  Eq.  411,  41  Atl.  1115,  55  N. 

23.  58  N.  J.  Eq.  556,  43  Atl.  671,      J.  Eq.  78,  35  Atl.  436. 


542  THE  ^AW  OF  PROMOTERS. 

Judge  Dixon,  writing  the  opinion,24  stated  that  when  the  defend- 
ant had  received  from  the  company  the  whole  ostensible  profits 
of  the  lands,  and  had  thus  become  bound  to  restore  to  it  the  dif- 
ference between  that  and  the  real  price,  he  could  not,  and  did  not, 
lessen  his  responsibility  by  paying  over  part  of  the  money  to  one 
who  had  no  more  right  to  it  as  against  the  company  than  he  him- 
self. On  reargument,25  however,  Judge  Garrison,  writing  the 
opinion,  said  that  the  fact  that  the  title  had  passed  through  the 
defendant  was  the  result  of  a  fortuitous  circumstance,  and  ought 
not  to  prejudice  his  case;  that  had  the  original  plan  been  adopted 
and  Roe  alone  taken  the  options,  conveyed  the  lands  to  the  com- 
pany and  received  the  purchase  price,  and  Loudenslager  had  been 
joined  in  a  suit  with  Roe  solely  because  of  the  agreement  that  Roe 
should  pay  him  half  the  profits,  Loudenslager  could  not  have  been 
held  beyond  the  profits  he  made  out  of  the  transaction.  "  The 
principle  running  through  all  the  authorities  upon  this  branch  of 
the  law  rests  not  upon  the  imposition  of  a  penalty  for  conceal- 
ment, but  upon  the  single  ground  that  one  in  a  fiduciary  capacity 
will  not  be  permitted  to  retain  a  profit  inequitably  obtained.  This 
is  the  rule  and  the  exact  measure  of  the  decree,  even  in  the  case  of 
a  trustee  who  actually  uses  the  company's  money  with  which  to 
make  the  proposed  purchase.  *  *  *  To  apply  to  one 

incidentally  benefited  the  same  rule  as  that  by  which  a  court  of 
equity  measures  the  liability  of  the  principal  actor  is  an  exten- 
sion most  favorable  to  complainant,  but  how  the  mere  extension 
of  the  doctrine  can  lead  to  a  change  in  the  measure  of  relief  is 
something  I  am  unable  to  see.  In  all  such  cases  equity  considers 
that  the  defendant  holds  what  otherwise  would  have  been  his 
profit  as  a  trustee  for  those  from  whom  it  was  without  disclosure 
obtained,  and  the  remedial  decree  is  that  he  refund  it  to  its  equit- 
able owners.  To  go  beyond  restitution,  and  decree  the  actual 
payment  of  a  sum  of  money  never  received  by  the  defendant  by 

24.  56  N.  J.  Eq.  411,  41  Atl.  1115.  25.  58  N.  J.  Eq.  556,  43  Atl.  671. 


PROMOTERS  INTER  SE.  543 

way  of  profit  or  otherwise  is  to  impose  a  penalty  of  a  sort  and 
in  a  fashion  unknown  to  courts  of  equity,  aside  from  cases  of 
active  fraud."  Judge  Garrison  added  that  the  erroneous  decree 
was  apparently  made,  first  because  of  the  failure  to  make  Roe  a 
party,  and  secondly  because  Loudenslager  had  manually  received 
the  entire  purchase  money  while  he  had  in  equity  received  only 
that  moiety  which  belonged  to  him  under  his  agreement  with  Roe. 
The  court  pointed  out  that  Loudenslager,  in  the  tradition  of  title, 
was  to  the  knowledge  of  the  company  a  mere  conduit,  and  that  a 
court  of  equity  would  judge  the  case  by  its  substance  and  not 
by  its  form.  The  judgment  appealed  from  was  modified  by  a  vote 
of  seven  to  five. 

In  Bigelow  v.  Old  Dominion  Copper,  etc.,  Co.,26  Bigelow  and 
Lewisohn  had  sold  certain  property  to  the  defendant  company  at 
a  large  profit.  Suits  were  brought  against  Lewisohn  in  the  Federal 
courts,  which  held  that  he  was  not  liable.  Bigelow  was  sued  in 
Massachusetts  and  judgment  entered  against  him  for  the  entire 
profits  received  by  Lewisohn  and  himself.  The  company  having 
been  organized  under  the  laws  of  New  Jersey,  Bigelow  filed  a  bill 
in  the  New  Jersey  Chancery  Court  praying  for  an  injunction 
against  the  prosecution  of  the  Massachusetts  suits,  alleging  as  one 
reason,  among  many,  for  the  interference  of  the  New  Jersey  court, 
that  if  he,  Bigelow,  was  liable  at  all,  he  was  not  liable  for  more 
than  his  own  personal  profit  in  the  transaction,  citing  Louden- 
slager v.  Woodbury  Heights  Land  Company,  supra.  Chancellor 
Pitney  said  that  whether  the  evidence  in  that  case  would  have 
justified  the  conclusion  that  Roe  and  Loudenslager  were  joint  pro- 
moters, acting  in  concert  in  the  acquisition  of  a  common  profit, 
was  a  question  with  which  he  was  not  concerned.  "  As  I  under- 
stand the  decision  *  *  *  *  it  rests  upon  the  view  that  in 
fact,  Roe  and  Loudenslager  stood  in  separate  and  distinct  rela- 
tions to  the  company,  and  that  the  profit  which  Roe  derived 

26.  74  N.  J.  Eq.  457,  71  Atl.  153. 


544  THE  LAW  OF  PROMOTERS. 

passed  through  Loudenslager's  hands,  not  in  his  capacity  as 
trustee  for  the  company,  but  '  in  an  alien  capacity  * 
If  the  court  of  errors  and  appeals  in  the  Loudenslager  Case  had 
intended  to  declare  that  when  trustees  acting  in  combination,  reap 
a  common  profit  out  of  a  fraudulent  transaction  with  their  cestui 
que  trust,  and  then  divide  the  profit  between  themselves  in  a  pro- 
portion previously  or  subsequently  agreed  upon  between  them, 
each  one  is  responsible  to  the  injured  party  only  for  that  which 
eventually  came  to  him  as  his  personal  share,  I  think  some  at- 
tention would  have  been  paid  in  the  reasoning  of  the  court  to  the 
numerous  decisions  which  hold  that  if  joint  trustees  be  guilty  of 
an  intentional  breach  of  trust,  they  are  liable  jointly  and  sever- 
ally, and  each  one  liable  in  solido,  and  that  it  is  not  necessary  to 
bring  them  all  into  court  as  a  condition  precedent  to  relief."  The 
chancellor  dismissed  the  point  with  the  statement  that  the  ques- 
tion of  the  extent  of  Bigelow's  liability  was,  in  any  event,  one  to  be 
decided  by  the  Massachusetts  courts. 

In  Arnold  v.  Searing,27  the  defendants  Fairchild  and  Searing 
obtained  options  for  the  purchase  of  all  the  shares  of  the  Passaic 
Rolling  Mill  Company.  The  stock  was,  under  the  options,  to  be 
deposited  with  the  Citizens  Trust  Company,  with  directions  to 
deliver  the  certificates  to  Fairchild  upon  payment  of  the  purchase 
price.  Fairchild  testified  that  he  procured  the  options  for  the 
account  of  the  Transit  Finance  Company.  On  the  26th  of  June, 
1902,  the  day  on  which  the  first  option  was  obtained,  an  agree- 
ment was  entered  into  between  the  Transit  Finance  Company  and 
Searing  reciting  the  proposed  organization  of  the  Passaic  Steel 
Company  to  take  over  the  shares  of  the  Passaic  Rolling  Mill 
Company,  and  providing  that  the  Transit  Finance  Company 
should  pay  to  Searing  for  his  services  one-half  of  the  profits  of 
the  transaction.  On  July  10th,  1902,  an  agreement  was  made 
between  the  defendants  Searing,  Fairchild  and  Bell,  ( the  latter  the 

27.  78  N.  J.  Eq.  146,  78  Atl.  762. 


PROMOTERS  INTER  SE.  545 

president  of  the  Citizens  Trust  Company)  which  after  reciting 
that  it  was  contemplated  that  the  cash  profit  would  amount  to 
$400,000  and  the  stock  profit  to  $3,000,000,  that  the  cash  and 
stock  profits  were  by  previous  agreement  to  be  equally  divided 
between  the  Transit  Finance  Company  and  Searing,  and  that 
Searing  desired  to  share  his  profits  with  Fairchild,  Bell  and 
Lazelle,  set  forth  that  Searing  would  distribute  his  one-half  share 
of  the  profits  as  follows:  $25,000  in  cash  and  $100,000  in  stock 
to  Lazelle,  one-quarter  of  the  balance  of  cash  and  stock  to  Bell, 
and  that  what  then  remained  should  be  equally  divided  between 
Fairchild  and  Searing.  It  appeared  that  Bell's  interest  was 
afterwards  by  oral  agreement  increased  from  one-quarter  to  one- 
third.  Vice  Chancellor  Howell  said,  "  The  defendants  Fairchild 
and  Searing  are  undoubtedly  liable,  jointly  and  severally,  for 
all  the  profits  made  by  the  promoters,  and  were 

it  not  for  the  view  which  the  court  of  errors  and  appeals  took  of 
the  defendant's  liability  in  the  Loudenslager  Case,  I  would  think 
that  Mr.  Bell  might,  on  principles  of  equity,  be  charged  equally 
with  them.  I  must  adopt  Chancellor  Pitney's  interpretation  of 
the  Loudenslager  Case,  in  his  opinion  in  the  Bigelow  Case,  supra* 
and  charge  Mr.  Bell  only  with  the  amount  of  profit  that  was  re- 
ceived by  him.  There  is  some  justice  in  the  application  of  the 
rule  in  the  Loudenslager  Case  to  the  case  of  Mr.  Bell,  for  the 
reason  that  he  stands  somewhat  apart  from  the  other  two  de- 
fendants in  his  attitude  toward  the  promotion  scheme,  and  in 
his  relation  to  the  transaction.  As  I  have  elsewhere  said,  he 
seems  to  have  done  little,  if  anything,  more  than  he  would  have 
been  required  to  do  as  president  of  the  trust  company ;  he  was 
made  a  participant  in  the  profits  principally  to  reimburse  him 
for  extra  labor  and  effort  to  wlu'ch  he  would  be  put  Li  that  ca- 
pacity." 

§  304.  Joint  liability  of  promoters  in  case  of  rescission. 

The  question  of  the  promoters  liability  in  solido  in  case  the 


546  THE  LAW  OF  PROMOTERS. 

corporation  elects  to  rescind  a  purchase  made  from  them,  or  some 
of  them,  raises  another  question.  The  common  vendors  of  prop- 
erty sold  to  the  corporation  are,  in  case  of  the  rescission  of  their 
sale,  undoubtedly  jointly  and  severally  liable  for  the  entire  pur- 
chase price  received  by  them.28 

In  Lindsay  Petroleum  Co.  v.  Hurd,29  the  defendant  Hurd  ob- 
tained from  the  defendant  Kemp  a  written  option  to  sell  him 
three  certain  lots  of  land.  The  price  mentioned  in  the  option  was 
$13,750.  Kemp  was,  in  fact,  the  owner  of  only  one  01  the  lots. 
The  defendant  Farewell  was  the  owner  of  an  interest  in  and  had 
power  to  contract  for  the  sale  of  the  whole  of  the  two  other  lots. 
The  parties  being  desirous  that  Kemp  should  appear  as  the  sole 
vendor  of  the  three  lots,  Farewell  nominally  sold  the  two  lots  to 
Kemp,  and  Kemp  agreed  to  sell  the  three  lots  to  Hurd.  Hurd  or- 
ganized a  corporation  to  purchase  the  lots  at  $13,750,  the  price 
mentioned  in  the  option.  It  was  later  ascertained  that  this  price 
was  not  the  true  price  but  inserted  by  collusion  between  Kemp, 
Farewell  and  Hurd  for  the  purpose  of  enabling  Hurd  to  make  a 
profit  out  of  the  transaction.  The  true  price  was  $10,000.  The 
corporation  having  brought  an  action  for  rescission,  the  vice 
chancellor  said,  "  Hurd  and  Farewell  are  in  pari  delecto.  They 
were  both  active  in  the  representations  made  to  the  company, 
and  the  decree  against  both  of  them  will  be  for  repayment  of 
the  whole  sum  paid  by  the  company  for  the  purchase  of  the  lands 
in  question;  the  whole  of  the  parcels,  as  well  those  sold  by 
Kemp  as  those  sold  by  Farewell,"  and  ultimately  decided  that  no 
distinction  could  be  made  as  to  Kemp,  and  that  he  must  be  held 
liable  with  the  others;  the  reconveyance  of  the  properties  to  be 
made  to  the  party  or  parties  who  should  make  the  payment  to 
the  plaintiff.  An  appeal  having  been  taken  to  the  Court  of  Error 

28.  New  Sombrero  Phosphate  Co.  phate  Co.,  L.  R.  3  App.  Gas.  1218, 

v.  Erlanger,  L.  R.  5  Ch.  Div.  73,  114,  6  Eng.  Rul.  Gas.  777,  39  L.  T.  N.  S. 

25   W.    R.   436,   affirmed,    *«&   nom.  269,  27  W.  R.  65. 

Erlanger    v.    New    Sombrero    Phos-  20.  L.  R.  5  P.  C.  221,  230,  232,  245. 


PROMOTERS  INTER  SB.  547 

and  Appeal  of  Ontario,  the  chief  justice  said,  "  I  have  found  no 
authority  nor  heard  any  argument  to  bring  me  to  the  conclusion 
that,  where  two  or  more  parties  combine  for  the  individual  and 
several  profit  of  each,  and  even  in  different  proportions,  in  fraud- 
ulent statements  and  untrue  representations  to  attain  their  object, 
they  are  not  each  liable  to  the  full  extent  to  make  good  to  the 
injured  party  the  loss  their  conduct  has  occasioned  to  him." 
The  judgment  of  the  Chancery  Court  was  reversed  on  the  ground 
that  the  right  to  rescind  had  been  lost  by  delay,  but  it  was  rein- 
stated by  the  Privy  Council  (subject  to  the  ability  of  the  plain- 
tiff to  make  a  reconveyance)  without  any  suggestion  that  judg- 
ment against  the  three  defendants  was  improper. 

Another  question  arises  as  to  the  extent  of  the  liability  of 
those  promoters  who,  while  parties  to  the  fraud  and  in  receipt  of 
a  part  of  the  purchase  price  by  way  of  commission,  never  had  any 
interest  in  the  property  sold  to  the  corporation  and  did  not  join 
in  the  conveyance.80 

In  Phosphate  Sewage  Company  v.  Hartmont,31  the  firm  of 
Hartmont  &  Company,  consisting  of  the  defendants  Hartmont 
and  Begbie,  obtained  from  the  government  of  San  Domingo  a 
fifty  year  concession  of  the  right  to  work  the  guano  deposits  on 
the  island  of  Alto  Vela.  This  concession  Hartmont  &  Company 
assigned  to  Lawson  &  Son.  Messrs.  Engelbach  and  Keir  were 
applied  to  as  financial  agents  to  organize  the  plaintiff  corpora- 
tion to  purchase  the  concession  at  £65,000.  Messrs.  Engelbach 
and  Keir  stipulated  that  they  were  to  have  as  their  commission 
£15,000,  and  it  was  arranged  that  the  remaining  £50,000  should 
be  divided  between  Hartmont  &  Company,  Lawson  &  Son  and 
Ogle  in  proportions  agreed  upon  between  themselves.  The  plain- 
tiff corporation  subsequently  brought  an  action  for  the  rescis- 
sion of  its  purchase  and  the  recovery  of  the  £65,000  purchase 

30.  See  cases  cited,  ante,  §  288,         31.  L.  R.  5  Ch.  Dlv.  394,  441-444, 
note  23,  and  §  243,  note  61.  457,  46  L.  J.  Ch.  061. 


548  THE  LAW  OF  PROMOTERS. 

money  paid  by  it.  The  concession  having  been  lost  by  reason  of 
a  defect  of  title  existing  at  the  time  of  the  transfer,  no  restitution 
was  possible  or  necessary.  The  court  held  that  Hartmont,  Begbie 
and  the  Lawsons  were  jointly  and  severally  bound  to  restore  to 
the  corporation  the  price  paid  by  it  for  the  concession,  and  that 
the  defendants  Engelbach  and  Keir  were  liable  to  restore  the 
£15,000  which  was  paid  to  them  as  a  commission,  the  court  saying 
that  having  regard  to  the  whole  case,  Engelbach  and  Keir  might 
perhaps  think  themselves  well  off  that  they  were  not  made  jointly 
and  severally  liable  with  Hartmont  and  the  Lawsons  for  the  en- 
tire sum.  Ogle,  who  afterwards  sold  his  interest  to  Hartmont 
for  £500,  was  held  liable  for  costs,  but  not  for  the  purchase 
money,  and  the  same  ruling  was  made  in  reference  to  Messrs. 
Cockburn,  Grant  and  Green,  who  had  signed  the  memorandum 
of  association  and  acted  as  directors  of  the  company!  Messrs. 
Emslie,  Forsyth  and  Sedgwick,  the  solicitors  who  represented 
both  the  vendor  and  the  purchasing  company  and  were  severely 
criticized  for  their  part  in  the  transaction,  were  also  held  liable 
only  for  costs,  as  was  one  Lonsdale,  who  was  the  organizer  of  the 
company  and  had  joined  with  Grant  in  signing  a  false  certificate 
filed  with  the  Stock  Exchange. 

In  Limited  Investment  Association  v.  Glendale  Investment  As- 
sociation,32 the  defendant  Glendale  Investment  Association,  the 
owner  of  a  tract  of  land,  authorized  the  defendant  Clayton  to  sell 
the  land  at  $2700  an  acre  and  agreed  to  pay  Clayton  a  commis- 
sion of  $200  an  acre.  Clayton  arranged  with  the  defendant 
Griffin  and  one  Pollock  to  organize  a  corporation  and  to  divide 
his  commission  with  them.  The  contract  of  sale  was  inadvertently 
made  to  Clayton,  who  assigned  it  to  the  corporation.  The  ven- 
dee corporation  upon  discovering  the  facts,  decided  to  rescind  its 
contract,  made  a  tender  to  Clayton  and  to  the  Glendale  Company, 
and  demanded  the  return  of  the  money  paid  by  it  on  the  contract. 

32.  99  Wis.  54,  74  N.  W.  633. 


PROMOTERS  INTER  8E.  54.9 

Judgment  was  given  against  all  the  defendants.  The  defendants 
Griffin  and  the  Glendale  Company  appealed.  The  court  said  that 
the  action  to  recover  the  money  paid  was  based  upon  an  implied 
assumpsit,  and  was  really  an  action  for  money  had  and  received. 
"  Such  being  the  case,  it  becomes  important  to  inquire  whether 
the  recovery  against  the  defendant  Griffin  can  be  maintained. 
The  rule  is  quite  elementary  that,  to  enable  a  person  to  maintain 
an  action  for  money  had  and  received,  it  is  necessary  for  him  to 
establish  that  the  persons  sought  to  be  charged  have  received 
money  belonging  to  him  or  to  which  he  is  entitled.  That  is  the 
fundamental  fact  upon  which  the  right  of  action  depends.33  The 
purpose  of  such  an  action  is  not  to  recover  damages,  but  to  make 
the  party  disgorge;  and  the  recovery  must  necessarily  be  limited 
by  the  party's  enrichment  from  the  alleged  transaction.  Evi- 
dence of  crooked  dealing  or  fraudulent  practices  is  only  import- 
ant in  determining  the  plaintiff's  right  to  secure  the  fund.  While 
it  may  be  admitted  that  all  the  defendants  were  joint  tort  feasors, 
to  the  extent  that  they  would  be  jointly  liable  for  all  damages 
the  plaintiff  has  sustained  by  reason  of  their  fraud,  yet,  when 
it  is  sought  to  render  them  liable  on  quasi  contract,  a  different 
rule  prevails.  The  basis  of  recovery  in  the  latter  case  being  a  loss 
on  one  side  and  a  consequent  enrichment  on  the  other,  liability 
can  only  exist  in  so  far  as  these  elements  concur. 
The  law  does  not  imply  a  promise  to  pay  for  something  the  party 
has  not  received,  while  in  the  case  of  the  tort  it  casts  upon  him 
an  obligation  to  pay  all  damage  done,  regardless  of  a  promise. 
Applying  these  observations  to  the  facts  before  us,  we  find  that 
every  dollar  of  the  money  sought  to  be  recovered  in  this  action 
was  paid  to  the  defendant  Glendale  Investment  Association  by 
the  plaintiff.  Not  one  cent  was  paid  to  Griffin,  or  came  to  his 
pocket,  except  as  it  came  through  the  Glendale  Company  to  Clay- 

33.  The  court  here  cites  National     33  Am.  Rep.  632. 
Trust  Co.  v.  Gleason,  77  N.  Y.  400, 


550  THE  LAW  OF  PROMOTERS. 

ton,  and  then  to  him.  The  amount  received  by  Griffin  was  but  a 
small  fraction  of  the  money  paid  by  plaintiff  to  the  Glendale 
Company.  The  plaintiff,  suing  as  for  a  rescission  of  its  contract, 
and  upon  the  implied  promise  to  restore  that  which  has  been  taken 
from  it,  is  bound  to  look  to  the  one  to  whom  it  paid  the  money. 
Cases  may  and  do  occur  where  the  money  sought  to  be  recovered 
was  received  by  one  for  the  benefit  of  others,  and  where  all  in- 
terested in  the  fund  will  be  jointly  liable.  But  this  is  not  such  a 
case."  « 

§  305.  Contribution  between  promoters. 

It  has  been  held  that  promoters  joining  in  a  fraud  upon  the 
corporation  are  joint  tort  feasors,  and  that  a  promoter  who  has 
been  compelled  to  pay  more  than  his  proportionate  share  of  the 
damages  of  the  corporation,  or  of  the. profits  of  the  promoters, 
cannot  enforce  contribution  from  his  fellows.34 

The  English  Directors  Liability  Act  of  1890  35  provided  that 
every  person  who  became  liable  to  make  any  payment  thereunder, 
should  be  entitled  to  contribution,  as  in  cases  of  contract,  from 
any  other  person  who,  if  sued  separately,  would  have  been  liable 
to  make  the  same  payment.  This  rule  is  now  qualified  by  a  pro- 
viso contained  in  the  Companies  Act  of  1908,36  that  such  person 

34.  Lomita  Land  &  Water  Co.  v.  New  Sombrero  Phosphate  Co.  v.  Er- 

Robinson,  154  Cal.  36,  52,  97  Pac.  langer,  L.  R.  5  Ch.  Div.  73,  114,  25 

10,  18  L.  R.  A.  N.  S.  1106,  1134 ;  Old  W.   R.  436,   affirmed,  sub  nom.  Er- 

Dominion  Copper,  etc.,  Co.  v.  Bige-  langer  v.  New  Sombrero  Phosphate 

low,   203   Mass.   159,   217,   89  N.   E.  Co.,  L.  R.  3  App.  Gas.  1218,  6  Eng. 

193,  40  L.  R.  A.  N.  S.  314,  affirmed,  Rul.  Gas.  777,V39  L.  T.  N.  S.  269,  27 

225  U.    S.  Ill,  32  Sup.  Ct.  641,  56  W.  R.  65. 

L.  Ed.  1009,  Am.  &  Eng.  Ann.  Gas.,  35.  Stat.  53  &  54  Viet.,  Ch.  64,  § 

1913   E.    875;    Bigelow   v.   Old   Do-  5;  Gerson  v.  Simpson,  1903,  2  K.  B. 

minion   Copper,   etc.,   Co.,   74   N.   J.  197;  Shepheard  v.  Bray,  1906,  2  Ch. 

Eq.  457,  512-513,  71  Atl.  153.     See  Div.  235,  75  L.  J.  Ch.  N.  S.  633 ;  but 

Gluckstein    v.    Barnes,    1900,    App.  see  1907,  2  Ch.  Div.  571,  76  L.  J.  Ch. 

Cas.     240,     255,     affirming,     In     re  N.  S.  692. 

Olympia,  Ltd.,  1898,  2  Ch.  Div.  153 ;  36.  Stat.  8  Edw.  7,  Ch.  69,  §  84, 

sub-section  4. 


PROMOTERS  INTER  8E. 


551 


shall  not  be  entitled  to  contribution  if  he  was,  and  the  other  per- 
son was  not,  guilty  of  fraudulent  misrepresentation. 

§  306.  Promoter's   liability  for   compensation  of  co-promoter. 
A  promoter  is  not,  in  the  absence  of  an  express  agreement, 
liable  to  pay  compensation  for  the  services  rendered  by  a  fellow 
promoter.37 

37.  Eakins    v.    American    White  Patterson  v.   Brown,  6  Ont.  W.  R. 

Bronze  Co.,  75  Mich.  568,  42  N.  W.  204. 

982;  Baily  v.  Burgess,  48  N.  J.  Eq.  As  to  the  right  of  a  promoter  to 

411,  22  Atl.  733 ;  Parkin  v.  Fry,  2  C.  recover  compensation  from  the  fully 

&  P.  311 ;  Wilson  v.  Curzon,  16  L.  J.  organized  corporation,  see  ante,  |f 

Exch.  N.  S.  122,  15  M.  &  W.  532;  84-87. 


CHAPTER  XVIII. 

OF  REORGANIZATIONS   AND   CONSOLIDATIONS. 

Section  307.  Introductory. 

308.  Promotion    under    employment    of    corporation    to    be    reor- 
ganized. « 

309.  Promoter  relying  upon  express  agreement   for  compensation 
bound  to  show  performance  within  its  terms. 

310.  Necessity  of  disclosing  to  new  corporation  compensation  paid 
by  old  corporation. 

311.  Payment  of  promoter's  fee  by  new  corporation,  not  a  fraud 
upon    rights    of    non-subscribing    stockholders    of    old    cor- 
poration. 

312.  Reorganization  in  fraud  of  rights  of  minority  stockholders. 

313.  Retention    by    promoter    of    dividend    paid    pending    consoli- 
dation. 

314.  New  corporation  not  necessary  party  to  suit  arising  out  of 
promoter's    fraud    upon    holders    of    securities    of   old    cor- 
poration. 

§  307.  Introductory. 

It  is  obvious  that  a  promoter  engaged  in  the  reorganization 
or  consolidation  of  existing  corporations,  is,  in  general,  subject 
to  precisely  the  same  liabilities  and  limitations  as  a  promoter 
engaged  in  the  organization  of  a  new  company.1  There  are,  how- 
ever, some  questions  which,  from  their  nature,  arise  only  upon 
the  reorganization  or  consolidation  of  existing  corporations. 

§  308.  Promotion  under  employment  of  corporation  to  be  re- 
organized. 
The  situation  of  a  promoter  upon  the  reorganization  of  an 

1.  See  Thompson  on  Corporation,  (2nd  ed.),  §  6019. 

(552) 


REORGANIZATIONS.  553 

existing  corporation  is  somewhat  different  from  that  of  a  pro- 
moter of  a  new  enterprise,  in  that  he  is  in  the  former  case  not 
necessarily  a  volunteer,  but  may  render  his  services  pursuant  to 
an  employment  by  the  existing  corporation. 

If  an  existing  company  has,  under  its  charter,  or  by  the  terms 
of  the  statute  under  which  it  is  organized,  power  to  reorganize 
or  to  consolidate  with  other  corporations,  it  has  implied  power 
to  employ  agents  to  accomplish  that  end  and  to  obligate  itself  to 
compensate  such  agents  for  their  services.2 

It  is  held  in  a  New  Jersey  case  that  a  corporation,  though  it  is 
insolvent  and  its  property  in  the  hands  of  a  receiver,  retains,  under 
the  provisions  of  the  statutes  of  that  state,  power  to  reorganize 
and  to  employ  agents  for  that  purpose,  and  that  the  corporation 
may,  after  it  has  resumed  control  of  its  property,  be  held  an- 
swerable for  the  compensation  of  such  agent.  The  question 
whether  the  agent  could  have  made  effectual  his  claim  for  compen- 
sation if  the  corporation  had  remained  insolvent  and  in  the  hands 
of  the  receiver  was  expressly  reserved.8 

The  agreement  of  an  existing  corporation  to  compensate  a  per- 
son employed  to  promote  its  reorganization  or  consolidation  may 
sometimes  be  implied.  If  the  promoter  is  a  director  or  an  offi- 
cer of  the  company  it  will  be  presumed  that  his  services  were 
rendered  gratuitously.4 

Whether  a  promoter  not  officially  connected  with  the  existing 
corporation  can  recover  for  his  services  upon  an  implied  contract 

2.  Linn  v.  Dlxon  Crucible  Co.,  59  to  be  rendered  in  relation  thereto  Is 

N.  J.  Law  28,  35  Atl.  2.    See  perhaps  invalid     and     unenforceable.       See 

General  Exchange  Bank  v.  Horner,  MacGregor  v.  Deal  &  Dover  Ry.  Co., 

L.  R.  9  Eq.  480,  and  Dundee  Subur-  18  Q.  B.   (Ad.  &  El.  N.  S.)  618,  22 

ban  Ry.,  10  Scots  Law  Times,  253,  L.  J.  Q.  B.  N.  S.  69. 

257.  3.  Linn  v.  Dixon  Crucible  Co.,  59 

If   the   contemplated    reorganiza-  N.  J.  Law  28,  35  Atl.  2. 

tion  or  consolidation  is  beyond  the  4.  Eakins     v.     American     White 

corporate  powers,  the  agreement  of  Bronze  Co.,  75  Mich.  568,  42  N.  W. 

the  corporation  to  pay  for  services  982. 


554  THE  LAW  OF  PROMOTERS. 

depends  upon  whether  it  can  from  all  the  circumstances  of  the 
case  fairly  be  inferred  that  it  was  the  understanding  of  the  parties 
that  the  services  were  to  be  paid  for  by  that  company. 

§  309.  Promoter  relying  upon  express  agreement  for  compen- 
sation bound  to  show  performance  within  its  terms. 

If  the  promoter  enters  into  an  express  agreement  for  compen- 
sation, contingent  upon  his  obtaining  certain  results,  he  must 
in  order  to  recover  such  compensation  show,  either  a  performance 
in  accordance  with  the  terms  of  his  contract,  or  that  performance 
was  prevented  or  waived  by  the  act  of  his  employer.5  He  must,  in 
such  case,  recover  upon  the  contract  if  at  all,  and  cannot  recover 
upon  a  quantum  meruit  for  such  services  as  he  did  perform.6 

In  Babbitt  v.  Gibbs,7  the  promoter  was  allowed  to  recover  his 
agreed  compensation  though  the  particular  scheme  through 
which  the  parties  originally  sought  to  reorganize  the  company 
was,  with  the  consent  of  the  parties,  amended,  and  the  reorgan- 
ization attained  in  a  manner  somewhat  different  from  that  con- 
templated at  the  time  of  the  promoter's  employment. 

§310.  Necessity  of  disclosing  to  new  corporation  compensa- 
tion paid  by  old  corporation. 

An  agreement  of  an  existing  company  to  pay  to  a  promoter 
compensation  for  his  services  upon  its  reorganization  or  consoli- 
dation, is,  though  within  the  powers  of  the  existing  company,  un- 
enforceable if  concealed  from  the  new  company.  The  agreement 
must,  to  be  valid,  be  fairly  disclosed  to  the  subscribers  for  the 
shares  of  the  new  company.  If  the  agreement  for  the  promoter's 
compensation  be  concealed,  and  the  subscribers  for  the  shares  of 

5.  Farjeon    v.    Indian    Territory  Atl.  246;  Connell  v.  Me  Walters,  54 

Illuminating  Co.,  146  N.  Y.  App.  Div.  Pittsburgh  Legal  Journal  O.  S.  69. 
23,  130  Supp.  532,  followed,  154  N.          6.  Fry  v.  Miles,  71  N.  J.  Law,  293, 

Y.  App.   Div.  936,  139   Supp.  1122;  59  Atl.  246,  and  see  ante,  §  88. 
Fry  v.  Miles,  71  N.  J.  Law  293,  59          7.  150  N.  Y.  2S1,  44  N.  E.  952. 


REORGANIZATIONS.  555 

the  new  company  are  allowed  to  believe  that  the  promoter  is 
going  into  the  new  company  upon  the  same  terms  as  themselves, 
the  secret  agreement  of  the  old  company  to  compensate  the  pro- 
motor  for  his  services  is  fraudulent  as  against  the  new  company 
and  its  subscribers.  The  situation  is  precisely  the  same  as  though 
the  owner  of  property  which  the  corporation  is  organized  to 
purchase  had  secretly  promised  to  compensate  the  promoter. 
That  such  an  agreement  is  not  enforceable  by  the  promoter  is 
shown  in  a  preceding  chapter.8 

If  it  were  known  to  the  subscribers  that  the  promoter  was  not 
interested  in  the  existing  company,  and  did  not  intend  to  become 
a  subscriber  for  the  shares  of  the  new  company,  it  might  well  be 
argued  that  the  subscribers  were  bound  to  understand  that  the 
promoter  was  not  rendering  his  services  gratuitously,  and  that  he 
was  acting  under  an  employment  by  the  existing  company  or 
some  interested  party.  The  promoter  is,  however,  under  the  more 
recent  decisions,  entitled  to  receive  reasonable  compensation  for 
his  services  from  the  corporation  which  he  promotes,9  and  the  sub- 
scribers might  very  well  assume  that  the  promoter  looked  for  his 
compensation  to  the  new  corporation  alone. 

§311.  Payment  of  promoter's  fee  by  new  corporation,  not  a 
fraud  upon  the  rights  of  the  non-subscribing  stock- 
holders of  the  old  corporation. 

In  Symmes  v.  Union  Trust  Company,10  suit  had  been  com- 
menced to  foreclose  a  mortgage  on  property  of  the  Sutro  Tunnel 
Company.  There  was  no  valid  defense  to  the  suit,  and  the  di- 
rectors of  the  company  thought  it  useless  to  attempt  to  levy  an 
assessment  upon  the  stock.  With  affairs  in  this  condition,  one 
Sutro  proceeded  to  organize  the  stockholders  of  the  company  with 
a  view  to  the  protection  of  their  interests.  Sutro  organized  a 

8.  See  ante,  §  288.  10.  60  Fed.  Rep.  830. 

9.  See  ante,  §  84. 


556  THE  LAW  OF  PROMOTERS. 

new  corporation  which  took  over  the  property  sold  under  fore- 
closure. All  of  the  stockholders  of  the  old  company  were  given 
an  opportunity  to  subscribe  for  shares  of  the  new  company.  It 
was  held  that  the  fact  that  Sutro  had  stipulated  for  and  received 
from  the  new  corporation,  or  from  the  reorganization  committee, 
a  fee  of  $100,000,  did  not  render  the  transaction  fraudulent,  or 
subject  it  to  attack  at  the  suit  of  the  non-subscribing  sharehold- 
ers of  the  old  company. 

4 

§  312.  Reorganization  in  fraud   of  rights   of  minority   stock- 
holders. 

An  attempt  to  reorganize  a  corporation  to  the  prejudice  of 
the  rights  of  the  minority  stockholders  was  condemned  in  Keith  v. 
Radway.11  The  Credit  Reporting  Company  of  New  England,  a 
Maine  corporation,  had  an  authorized  capital  of  $20,000  divided 
into  2,000  shares  of  the  par  value  of  $10  each.  Of  these  2,000 
shares,  William  S.  Radway  and  his  mother  owned  1,481,  and  were 
in  full  control  of  the  company.  Radway  organized,  under  the 
laws  of  Massachusetts,  a  new  corporation  also  called  the  Credit 
Reporting  Company  of  New  England,  with  an  authorized  capi- 
tal of  $50,000  divided  into  5,000  shares  of  the  par  value  of  $10 
each.  Radway  in  the  organization  of  the  new  corporation,  asso- 
ciated with  himself  two  of  his  employees,  each  of  whom  subscribed 
for  ten  shares  of  stock.  Radway  subscribed  for  the  remaining 
4,980  shares,  but  never  paid  any  money  therefor.  Radway  called 
a  meeting  of  the  stockholders  of  the  old  corporation,  and  by 
means  of  his  control,  voted  to  sell  to  himself  all  the  assets  of  the 
old  corporation  for  $19,540,  payable  in  stock  of  the  new  corpo- 
ration at  par.  Of  the  4,980  shares  of  stock  of  the  new  corpora- 
tion issued  to  Radway  he  apparently  turned  in  1,954  shares  to 
the  old  corporation  in  payment  for  its  assets,  and  retained  the 
remaining  3,026  shares  for  himself,  paying  no  consideration  there- 

11.  220  Mass.  532,  108  N.  E.  498. 


REORGANIZATIONS.  557 

for.  Suit  was  brought  by  the  minority  stockholders  of  the  old 
corporation.  A  demurrer  to  the  plaintiff's  bill  was  sustained  by 
the  Superior  Court.  The  Supreme  Court  reversed  the  judgment 
of  the  Superior  Court  and  overruled  the  demurrer,  saying  that 
the  old  coporation  for  whose  benefit  the  suit  was  brought,  was 
clearly  entitled  to  some  relief.  What  that  relief  was  to  be  was 
not  determined. 

§  313.  Retention  by  promoter  of  dividend  paid,  pending  consoli- 
dation, on  shares  temporarily  in  his  hands. 
A  curious  fraud  was  attempted  in  the  organization  of  the 
National  Salt  Company.  The  defendant,  one  of  the  promoters  of 
the  consolidated  company,  obtained  an  option  for  the  purchase 
from  one  Gardiner,  of  120  shares  of  the  stock  of  the  Empire  Dairy 
Salt  Company,  one  of  the  constituent  companies  to  be  taken  over. 
Under  this  option,  Gardiner  agreed  to  transfer  his  shares  to  the 
defendant,  or  to  the  consolidated  corporation,  and  to  accept  pay- 
ment partly  in  cash  and  partly  in  the  preferred  and  common 
shares  of  the  new  company.  Thereafter  the  defendant  notified 
Gardiner  to  transfer  his  shares  to  the  National  Salt  Company, 
expressly  disclaiming,  however^  any  responsibility  for  the  pay- 
ment of  the  purchase  price,  except  as  he,  the  defendant,  might 
receive  from  the  National  Salt  Company  the  consideration  to  be 
paid  by  it.  Gardiner  delivered  his  stock  certificates  to  the  de- 
fendant. The  defendant  had  himself  elected  a  director  of  the  Em- 
pire Salt  Company,  and,  on  his  motion,  a  dividend  of  31^  per 
cent  upon  its  capital  stock  was  declared.  The  dividend  on  Gardi- 
ner's shares  was  paid  to  and  retained  by  the  defendant.  The 
court  held  that  it  was,  under  the  circumstances  of  the  case,  clear 
that  the  defendant  never  became  the  beneficial  owner  of  the  shares, 
that  he  held  the  same  as  agent  for  Gardiner  and  must  account  to 
him  for  the  dividend.12 

12.  Rowe  v.  White,  112  N.  Y.  App.      without  opinion,  189  N.  T.  528,  82 
Div.    688,    98    Supp.    729,    affirmed      N.  E.  1132. 


558  THE  LAW  OF  PROMOTERS. 

§  314.  New  corporation  not  a  necessary  party  to  suit  arising 
out  of  promoter's  fraud  upon  holders  of  securities 
of  old  corporation. 

In  Dunning  v.  Bates,13  the  defendants  had  been  appointed  trus- 
tees for  the  bondholders  of  the  North  Side  Land  and  Mortgage 
Company,  and  directed  to  foreclose  the  mortgages  by  which  the 
bonds  were  secured,  to  buy  in  the  lands  sold  under  foreclosure,  to 
organize  a  new  corporation  of  which  the  bondholders  were  to  be 
stockholders,  and  to  transfer  the  lands  so  purchased  to  this  new 
company.  One  of  the  former  bondholders  brought  suit  against 
the  defendant  trustees  claiming  that  they  had  not  transferred 
to  the  new  corporation,  all  the  lands  purchased  by  them  upon 
the  foreclosure.  The  court  held  that  the  defendants  were  trustees 
for  the  original  bondholders  and  accountable  to  the  latter  and, 
by  a  divided  court,  that  the  new  corporation  was  not  a  necessary 
party  to  the  suit. 

13.  186  Mass.  123,  71  N.  E.  309. 


CHAPTER  XIX. 

OF   ABORTIVE  PROMOTIONS. 

Section.  315   Introductory. 

316.  Expenses  of  attempted  organization  of  corporation. 

317.  Compensation  of  promoters. 

318.  Contribution  between  promoters. 

319.  Subscribers  not  liable  for  expenses  of  abortive  promotion. 

320.  Circumstances  rendering  subscribers  liable  for  expenses. 

321.  Repayment  of  subscribers'  deposits. 

322.  The    same    subject. — Circumstances    under    which    expenses 
may  be  deducted. 

323.  Liability  upon  subscription  notes. 

324.  Proof  of  abandonment  of  promotion. 

325.  All  promoters  not  necessarily  liable  for  return  of  deposits. 

326.  Recovery  from  depositary. 

327.  Rights  of  purchasers  of  shares  of  abortive  corporation. 

328.  Subscriber's  action  for  recovery  of  deposit. 

329.  The  same   subject. — Voluntary  account  of  promoter  as   bar 
to  subscriber's  action  for  accounting. 

330.  Accounting  by  promoters. — Disbursements  allowable. 

331.  Disposition     of    property    acquired     pending    promotion     of 
abortive  corporation. 

332.  Liability  of  promoters  of  defectively  organized  corporation. 

§315.  Introductory. 

Questions  relating  to  abortive  promotions  are,  because  of  the 
method  of  organization  there  pursued,  bound  to  arise  with  greater 
frequency  and  in  a  more  complicated  form  in  England  than  in 
this  country.  The  granting  of  the  corporate  charter  is  in  Eng- 
land often  postponed  until  after  the  share  capital  has  been  sub- 
scribed and  the  company  is  substantially  ready  to  carry  on  the 

(558) 


560  THE  LAW  OF  PROMOTERS. 

corporate  business.1  Deposits  on  the  shares  are  in  such  case  re- 
ceived, and  heavy  obligations  and  expenses  often  incurred,  while 
the  company  is  still  in  process  of  formation.  If  the  enterprise 
proves  abortive  and  the  incorporation  of  the  company  is  aban- 
doned, the  adjustment  of  the  rights  and  obligations  of  the  parties 
is  a  matter  of  much  difficulty.  While  many  of  the  questions  that 
arise  in  England  do  not  arise  under  the  method  of  organization 
generally  followed  in  this  country,  it  is  thought  best  to  consider 
the  English  and  American  cases  together. 

§  316.  Expenses  of  attempted  organization  of  corporation. 

The  expenses  of  the  attempted  organization  of  an  abortive  cor- 
poration are  in  general  to  be  borne  by  the  promoters.  As  pro- 
moters are  not  partners,2  it  does  not  follow  that  all  the  pro- 
moters are  jointly  and  severally  liable  for  these  expenses.3  A 
promoter  is  liable  for  the  expenses  arising  out  of  contracts  made 
by  him,  or  by  his  co-promoters  or  agents  pursuant  to  his  au- 
thority, but  some  privity  must  be  shown.4  The  authorization 

1.  Miller    v.    Denman,    49    Wash.  Ch.  N.  S.  366;  Ex  parte  Roberts,  2 
217,  222,  95  Pac.  67,  69,  16  L.  R.  A.  Macn.  &  G.   192,   affirming,  3  DeG. 
N.  S.  348,  351.    And  see  ante,  §  12.  &  Sm.  205 ;  Ex  parte  Besley,  3  Macn. 

2.  See  ante,  §§  77,  302.  &  G.  287,  reversing  on  rehearing,  2 

3.  Hamilton  v.  Smith,  5  Jur.  N.  S.  Macn.  &  G.   176,  which  reversed  3 
32;  Wood  v.  Argyll,  6  M.  &  G.  928.  DeG.  &  Sm.  224;  McEwan  v.  Camp- 

4.  The  cases  found  in  the  English  bell,  2  Macq.  499 ;  Maitland's  Case, 
reports  relating  to  the  liability  of  3  Giff .  28 ;  Ex  parte  Lloyd,  1  Sim.  N. 
provisional  committeemen  of  abor-  S.  248;  Carrick's  Case,  1  Sim.  N.  S. 
tive  corporations  have  some  bearing  505 ;  Norbury's  Case,  5  DeG.  &  Sm. 
upon  the  question  of  the  liability  of  423 ;  Ex  parte  Stocks,  22  L.  J.  Ch. 
the  promoters  of  abortive  corpora-  N.  S.  218;  Barker  v.  Stead,  3  C.  B. 
tions.  946;   Newton  v.   Belcher,   12  Q.   B. 

It    is    held    that    one    does    not,  (Ad.  &  EL  N.  S.)  921,  18  L.  J.  Q.  B. 

merely   by   becoming   a   provisional  N.  S.  53;  Newton  v.  Liddiard,  12  Q. 

committeeman,  make  himself  liable  B.  (Ad.  &  El.  N.  S.)  925,  18  L.  J.  Q. 

for  the  debts  incurred  by  his  fellow  B.    N.    S.   53;    Griffin   v.   Beverly,   2 

committeemen.     Norris  v.   Cottle,  2  Car.  &  K.  648;  Barker  v.  Lyndon,  2 

H.  L.  Cas.  647,  affirming,  Ex  parte  Car.  &  K.  651;  Giles  v.  Comfoot,  2 

Cottle,  2  Macn.  &  G.  185,  19  L.  J.  Car.  &  K.  653;  Cooke  v.  Tonkin,  9 


ABORTIVE  PROMOTIONS. 


561 


need  not  be  express.     It  may  be  implied  from  the  circumstances 
surrounding  the  transaction.5 


Q.  B.  936 ;  Ex  parte  Clarke,  20  L.  J. 
Ch.  N.  S.  14;  Reynell  v.  Lewis,  15 
M.  &  W.  517 ;  Wyld  v.  Hopkins,  id ; 
cf.  Doubleday  v.  Muskett,  7  Bing. 
110;  Ex  parte  Studley,  14  Jur.  539; 
Bremner  v.  Chamberlayne,  2  Car.  & 
K.  560. 

If  the  fact  is  that  a  provisional 
committeeman  was  not  originally 
liable  for  the  debts  of  the  abortive 
company,  he  does  not  make  himself 
liable  by  making  payments  causa 
pads.  Ex  parte  Besley,  3  Macn.  & 
G.  287,  reversing  2  Macn.  &  G.  176, 
reversing,  3  DeG.  &  Sm.  224;  Ex 
parte  Roberts,  2  Macn.  &  G.  192, 
affirming,  3  DeG.  &  Sm.  205;  Norris 
v.  Cottle,  2  H.  L.  Cas.  647,  669;  Ex 
parte  Stocks,  22  L.  J.  Ch.  N.  S.  218; 
Hall's  Case,  3  DeG.  &  Sm.  214 ;  Tan- 
ner's Case,  5  DeG.  &  Sm.  182. 

Allowing  one's  name  to  be  pub- 
lished as  a  director  does  not  make 
one  liable  for  the  expenses  of  organ- 
izing the  company.  Burbidge  v. 
Morris,  3  H.  &  C.  664. 

A  provisional  committeeman  is  not 
responsible  for  the  debts  incurred 
by  a  managing  committee  appointed 
by  the  provisional  committee,  even 
though  the  defendant  committeeman 
participated  in  the  appointment  of 
the  managing  committee.  Tanner's 
Case,  5  DeG.  &  Sm.  182,  see  also 
Bright  v.  Hutton,  3  H.  L.  Cas.  341, 
and  Dawson  v.  Morrison,  5  Ry.  & 
Can.  Cas.  62;  cf.  Brown  v.  Andrew, 
13  Jur.  938.  Nor  is  he  liable  if  he 
is  without  his  knowledge  appointed 
a  managing  committeeman,  but  does 


not  act  as  such.  Ex  parte  Hight,  1 
Drew.  484. 

It  is  held  that  a  regulation  of  a 
managing  committee  (empowered  by 
the  subscribers'  agreement  to  make 
regulations)  that  checks  shall  be 
drawn  by  any  three  members  of  the 
committee,  is  valid  and  proper,  and 
that  the  other  members  of  the  com- 
mittee are  not  responsible  because 
of  a  check  drawn  by  three  members 
of  the  committee  in  pursuance  of 
this  regulation,  (Maitland's  Case,  4 
DeG.  M.  &  G.  769),  unless  such  other 
committeemen  authorized  the  sign- 
ing of  the  check,  or  were  in  some 
other  way  connected  with  the  trans- 
action. Carpenter's  &  Weiss's  Case, 
5  DeG.  &  Sm.  402. 

A  provisional  committeeman  is,  of 
course,  liable  for  debts  incurred  by 
him  personally,  (Pearson's  Execu- 
tors' Case,  3  DeG.  M.  &  G.  241,  252; 
Ex  parte  Lloyd,  1  Sim.  N.  S.  248; 
Carrick's  Case,  1  Sim.  N.  S.  505, 
509),  or  pursuant  to  his  authoriza- 
tion, (Reynell  v.  Lewis,  15  M.  &  W. 
517;  Wyld  v.  Hopkins,  id.),  and  for 
debts  incurred  by  his  fellow  com- 
mitteemen if  sanctioned  or  ratified 
by  him.  Pearson's  Executors'  Case, 
3  DeG.  M.  &  G.  241,  252-253;  Spot- 
tiswoode's  Case,  6  DeG.  M.  &  G.  345, 
371;  Carrick's  Case,  1  Sim.  N.  S. 
505,  509;  Bright  v.  Hutton,  3  H.  L. 
Cas.  341,  also  Brown  v.  Andrew,  13 
Jur.  938,  18  L.  J.  Q.  B.  N.  S.  153. 

The  question  of  authorization  is 
one  of  fact,  (Bailey  v.  Macaulay, 
13  Q.  B.  (Ad.  &  El.  N.  S.)  815; 


562 


THE  LAW  OF  PROMOTERS. 


Power  to  bind  the  co-promoters  will  more  readily  be  implied  if 
it  is  shown  that  the  parties  had  in  addition  to  acting  as  promoters, 
joined  in  the  purchase  or  acquisition  of  franchises  or  proper- 
ties to  be  conveyed  to  the  corporation,  for  they  occupy,  as  parties 
to  such  venture,  a  relation  akin  to  that  of  partners.6 

The  promoters  are  not  liable  to  an  agent  who  renders  services, 
or  incurs  expenses,  under  an  agreement  that  he  will  look  for  re- 
imbursement to  the  moneys  to  be  paid  in  by  the  subscribers  for 


Maddick  v.  Marshall,  17  C.  B.  N.  S. 
829,  affirming,  16  C.  B.  N.  S.  387; 
Williams  v.  Pigott,  2  Exch.  201; 
Rennie  v.  Clarke,  5  Exch.  292 ;  Bar- 
rett v.  Blunt,  2  C.  &  K.  271;  Nor- 
bury's  Case,  5  DeG.  &  Sm.  423), 
and  an  authorization  or  sanction 
will  be  readily  inferred,  (Barnett  v. 
Lambert,  15  M.  &  W.  489;  Spottis- 
woode's  Case,  6  DeG.  M.  &  G.  345, 
and  see  cases  cited  in  preceding 
parenthesis).  The  burden  of  proof, 
however,  rests  upon  the  person  as- 
serting the  liability  of  the  provi- 
sional committeeman,  (Reynell  v. 
Lewis,  15  M.  &  W.  517;  Bright  v. 
Hutton,  3  H.  L.  Cas.  341;  Patrick 
v.  Reynolds,  1  C.  B.  N.  S.  727; 
Brown  v.  Andrew,  13  Jur.  938).  A 
modification  of  the  contract  will  not 
always  release  a  non-assenting  com- 
mitteeman. Amsinck's  Case,  6 
DeG.  M.  &  G.  345. 

It  was  at  one  time  supposed  that 
the  House  of  Lords  had  in  the  case 
of  Hutton  v.  Upfill,  (2  H.  L.  Cas. 
674 — August,  1850),  established  a 
rule  that  a  provisional  committee- 
man  who  accepts  an  allotment  of 
shares  is  responsible  for  the  debts 
of  the  company;  that  neither  the 
fact  of  being  a  provisional  commit- 
teeman nor  the  fact  of  taking  shares 


is  in  itself  sufficient  to  make  him 
liable,  but  that  the  concurrence  of 
the  two  establishes  his  liability. 
The  lower  courts  felt  themselves 
bound  by  what  they  believed  to  be 
the  decision  of  the  House  of  Lords 
and,  with  some  remonstrance,  ap- 
plied it,  (Markwell's  Case,  5  DeG.  & 
Sm.  528,  16  Jur.  989;  Sharpe  & 
James'  Case,  1  DeG.  M.  &  G.  565 ;  Ex 
parte  Stocks,  22  L.  J.  Ch.  N.  S.  218 ; 
Maudslay  &  Field's  Case,  17  Sim. 
157,  20  L.  J.  Ch.  N.  S.  9;  Car- 
michael's  Case,  17  Sim.  163;  Ex 
parte  Roberts,  1  Drew.  204 ;  Ex  parte 
Brittain,  1  Sim.  N.  S.  281;  Ex 
parte  Sichell,  1  Sim.  N.  S.  187;  Ex 
parte  Morrison,  20  L.  J.  Ch.  N.  S. 
296,  15  Jur.  346;  Nicholay's  Case, 
15  Jur.  420),  until  the  House  of 
Lords  itself  disclaimed  the  supposed 
effect  of  its  decision.  Bright  v. 
Hutton,  3  H.  L.  Cas.  341,  385,  et  seq., 
(June,  1852),  reversing  Bright's 
Case,  1  Sim.  N.  S.  602. 

5.  Patrick  v.  Reynolds,  1  C.  B.  N. 
S.  727;  Lake  v.  Argyll,  6  Ad.  &  El. 
N.  S.  477;  Wood  v.  Argyll,  6  M.  & 
G.  928. 

6.  See  Ijams  v.  Andrews,  151  Fed. 
Rep.    725,    81    C.    C.    A.    109;    also 
Sanders  v.   Herndon,  128   Ky.   437, 
32  Ky.  L.  R.  1362,  108  S.  W.  908. 


ABORTIVE  PROMOTIONS.  553 

the  company's  shares.7  Nor  do  the  promoters  in  such  case  be- 
come liable  to  the  agent  if,  upon  the  abandonment  of  the  corpo- 
rate scheme,8  or  upon  learning  that  the  subscriptions  were  made 
in  reliance  upon  a  misrepresentation  of  the  facts,9  they  return  the 
moneys  received  from  the  subscribers. 

An  agreement  of  one  employed  by  the  promoters,  that  he  will 
make  no  claim  for  compensation  unless  the  company  is  actually 
organized  and  the  stipulated  capital  paid  in,  does  not  relieve  the 
promoters  from  personal  responsibility,  but  no  recovery  can,  in 
such  case,  be  had  against  them  unless  it  is  shown  that  the  condi- 
tions of  the  agreement  have  been  complied  with.10 

§  317.  Compensation  of  promoters. 

There  is  a  presumption  that  a  promoter  looks  for  his  reward 
to  the  success  of  the  enterprise,  and  not  to  his  fellow  promoters. 
A  recovery  of  compensation  from  his  fellows  can  be  had  only  upon 
an  express  agreement  to  pay  for  the  services.11 

7.  Barron  v.  International  Trust      Locke  v.  Wilson,  135  Mich.  593,  98 
Co.,   184  Mass.  440,   68  N.   E.   831 ;      N.  W.  400,  1Q  Det.  Leg.  News,  900. 
Landman  v.  Entwistle,  7  Exch.  632.          10.  Locke   v.    Wilson,    135   Mich. 

When  such  moneys  have  been  paid  503,    98   N.    W.    400,    10   Det.    Leg. 

In,    suit    will    lie   against   the   pro-  News  900;  Fry  v.  Miles,  71  N.  J.  L. 

moters  personally.    Higgins  v.  Hop-  293,  59  Atl.  246;  Nichols  v.  North 

kins,   3    Exch.    163,    and    see   cases  Metropolitan  Railway  &  Canal  Co., 

cited  under  note  10.     See  also  ante,  71  L.  T.  N.  S.  836,  affirmed,  74  L. 

§§  77,  88.  T.  N.  S.  744,  and  see  ante,  §§  88,  77. 

8.  Landman  v.  Entwistle,  7  Exch.  But  an  assurance  given  to  a  pro- 
632.  moter  or  subscriber  that   he   shall 

9.  Barron  v.  International  Trust  not  incur  any  liability  for  the  ser- 
Co.,   184  Mass.  440,  68  N.   E.  831;  vices  of  the  person  giving  such  as- 
Locke  v.  Wilson,  135  Mich.  593,  98  surance  unless  the  organization  of 
N.  W.  400,  10  Det.  Leg.  News,  900.  the  company  is  completed,  has  been 

The  employee  might  recover  from  held    to    be    not    an    agreement    to 

the  promoters  if  the  representations  exonerate    the    common    fund,    but 

which     induced     the    subscriptions  simply  an  agreement  to  indemnify 

were  made  by  the  promoters  them-  the    promisee    personally.      Shaw's 

selves,  or  by  some  other  person  in  Claim,  L.  R.  10  Ch.  App.  177. 

reliance     upon     their     statements.  11.  Kakins    v.    American    White 


564 


THE  LAW  OF  PROMOTERS. 


§  318.  Contribution  between  promoters. 

A  promoter  who  has  paid  the  expenses,  or  a  part  of  the  ex- 
penses, of  the  attempted  organization  of  a  company,  is  entitled  to 
contribution  from  such  of  his  fellow  promoters  as  were  also  liable 
for  the  same,  or  a  part  of  the  same,  expenses.12  Due  allowance 
must  of  course  be  made  to  the  defendant  promoters  for  any  ex- 
penses paid  by  them  for  which  the  plaintiff  was  liable.13  The  ad- 
justment of  the  liabilities  of  the  promoters  may  sometimes  be  a  mat- 
ter of  considerable  intricacy,  as  varying  combinations  of  pro- 
moters may  well  be  liable  for  different  items. 

It  has  been  said,  in  some  English  cases,  that  a  promoter 
though  not  liable  directly  to  the  creditors,  may  still  be  liable  for 
contribution  to  his  co-promoters  who  are  liable  to  the  creditors, 
if  their  liability  to  the  creditors  was  incurred  upon  his  engagement 


Bronze  Co.,  75  Mich.  568,  42  N.  W. 
982;  Baily  v.  Burgess,  48  N.  J.  Eq. 
411,  22  Atl.  733;  Parkin  v.  Fry,  2 
C.  &  P.  311;  Wilson  v.  Curzon,  16 
L.  J.  Exch.  N.  S.  122,  15  M.  &  W. 
532;  Patterson  v.  Brown,  6  Ont.  W. 
R.  204. 

As  to  the  right  of  promoters  to 
recover  compensation  from  the  fully 
organized  corporation,  see  ante,  §§ 
84-87. 

12.  Lefroy  v.  Gore,  1  Jones  & 
LaTouche  571 ;  Pearson's  Execu- 
tors' Case,  3  DeG.  M.  &  G.  241,  248; 
see  Spottiswoode's  Case,  6  DeG.  M. 
&  G.  345,  371. 

It  is  held  in  Pearson's  Executors' 
Case,  3  DeG.  M.  &  G.  241,  that  a 
member  of  the  managing  committee 
liable  for  contribution  for  the  ex- 
penses paid  by  one  of  his  fellow 
committeemen,  is  not  saved  from 
further  liability  by  a  letter  from 


the  secretary  of  the  committee  call- 
ing upon  the  members  thereof  to 
pay  a  sum  named,  and  stating  that 
they  would  be  exonerated  from  fur- 
ther liability.  The  court  said  that 
the  letter  "  might  have  been  a  good 
exoneration  to  persons,  who,  being 
subject  to  a  doubtful  liability,  were 
called  upon  by  those  whose  liability 
was  admitted,  offering,  on  payment 
of  £160,  to  exonerate  -the  persons 
whose  liability  was  doubtful.  As 
addressed  to  such  persons  the  letter 
is  intelligible.  But,  as  between  the 
secretary  and  those  members  of  the 
managing  committee  who  are  ex 
concessis  the  parties  liable,  the  let- 
ter seems  nugatory.  It  is  only  a 
statement  to  them  from  their  own 
agent,  that  on  payment  of  £160  each 
they  will  be  exonerated."  See  post, 
§  320. 

13.  Denton  v.   Macneil,   L.   R.   2 
Eq.  352. 


ABORTIVE  PROMOTIONS.  555 

with  his  co-promoters  to  contribute  ratably  with  them.14  Such 
agreement  to  contribute  would,  however,  seem  to  establish  an 
agency,  and  render  the  promoter  who  agreed  to  contribute  liable 
directly  to  the  creditors. 

§  319.  Subscribers  not  liable  for  expenses  of  abortive  promotion. 
The  undertaking  of  the  subscriber  is  ordinarily  a  mere  agree- 
ment to  take  shares  in  a  corporation  to  be  organized  in  accord- 
ance with  the  subscription  contract.  Whether  the  formation  of 
such  a  corporation  is  feasible,  whether  the  contemplated  proper- 
ties can  be  acquired  and  the  desired  capital  obtained,  are  matters 
of  which  the  subscriber  has  ordinarily  no  means  of  judging,  and 
as  to  which  the  promoter  must,  in  the  absence  of  a  contrary  under- 
standing, take  the  risk.  If  the  corporation  is  not  organized  and 
the  shares  subscribed  for  are  not  delivered,  the  subscriber  is  re- 
leased from  liability  upon  his  subscription  and  is  in  no  way  re- 
sponsible for  the  expenses  of  the  attempted  organization.  He 
cannot  be  compelled  to  reimburse  the  promoters  for  any  part  of 
the  expenses  incurred  by  them,15  nor  is  he  liable  directly  to  the 
creditors  for  the  debts  incurred  by  the  promoters.16 

§  320.  Circumstances  rendering  the  subscribers  liable  for  ex- 
expenses. 
Subscribers  may,  by  express  agreement,  make  themselves  liable 

14.  Carrick's  Case,  1  Sim.  N.  S.      (overruling  Mathew's  Case,  14  Jur. 
505,  510 ;  Norbury's  Case,  5  DeG.  &      928,   3   DeG.   &   S.   234 ;    Hutton   v. 
Sm.  423,  427.  Thompson,  3  H.  L.  Cas.  161 ;  Maud 

Cf.  Lefroy  v.  Gore,  1  Jones  &  La-  slay  &  Field's  Case,  17  Sim.  157,  20 

Touche,  571,  581.  L.   J-  Ch.  N.  S.  9;  Carrick's  Case, 

15.  Middle  Branch  Mut.  Tel.  Co.  1  Sim.  N.  S.  505;  Ex  parte  Walstab, 
r.  Jones,  137  Iowa  396,  115  N.  W.  20   L.   J.   Ch.   N.   S.   58;    Ex  parte 
3   and   cases  cited   under   note  16.  Hirschel,  15  Jur.  942;  cf.  Rambaut 
See  also  cases  cited,  post,  §  321.  v.  Tevis,  164  N.  T.  App.  Div.  324, 

16.  Ex  parte  Beardshaw,  1  Drew.  149  Supp.  993. 

226;  Capper's  Case,  1  Sim.  N.  S.  178,         See  also  cases  cited,  post,  |  321. 


566 


THE  LAW  OF  PROMOTERS. 


for  the  expenses  of  the  attempted  incorporation.17  The  subscrib- 
ers may  also  be  liable  for  their  proportionate  share  of  the  ex- 
penses if  their  agreement,  instead  of  a  mere  contract  to  take 
shares  of  the  corporation  when  organized,  amounts  to  a  contract 
to  join  the  promoters  in  the  organization  of  the  company.18  The 
subscribers  may  perhaps  be  liable  for  the  compensation  of  an 
agent  who  rendered  services  in  the  organization  of  the  company 
pursuant  to  appointment  at  a  meeting  of  the  subscribers,  if  the 
circumstances  are  such  as  to  justify  the  inference  that  the  agent 
was  to  be  paid  for  his  services.19 

It  was  held  in  Ex  parte  Apps  20  that  if  the  circumstances  of 
the  transaction  are  such  as  to  render  the  subscribers  liable  for 


17.  Gay's  Case,  1  DeG.  M.  &  G. 
347,  affirming,  5  DeG.  &  Sm.  122; 
Hopkinson's  Case,  7  DeG.  M.  &  G. 
193;  Ex  parte  Bowen  &  Martin,  22 
L.  J.  Ch.  N.  S.  856,  and  see  Prichi 
ard's  Case,  5  DeG.  M.  &  G.  484,  also 
Sandusky  Coal  Co.  v.  Walker,  27 
Ont.  677. 

It  was  held  in  Carew's  Case,  (7 
DeG.  M.  &  G.  43),  that  an  agree- 
ment of  the  subscribers  to  indemnify 
the  managing  directors  against  the 
expenses  of  the  formation  of  the 
company,  may  be  avoided  by  show- 
ing that  it  was  procured  from  the 
subscribers  by  misrepresentations  of 
the  promoters.  It  was  also  held  that 
the  indemnity  agreement  was  unen- 
forceable for  the  reason  that  it  was 
entered  into  by  the  subscribers  on 
the  faith  that  the  managing  di- 
rectors would  sign  as  subscribers 
and  be  bound  jointly  with  them,  and 
that,  the  managing  directors  having 
failed  to  sign,  the  subscribers  were 
entitled  to  have  the  agreement  can- 
celled. 


Subscribers  are  sometimes  made 
liable  for  the  expenses  of  the  at- 
tempted organization  of  a  corpora- 
tion, by  the  terms  of  the  special  act 
of  incorporation  under  which  the 
organization  is  attempted.  See 
Salem  Mill  Dam  Corporation  v. 
Ropes,  6  Pick  (Mass.)  23,  41,  9 
Pick.  (Mass.)  187,  19  Am.  Dec.  363. 

18.  See  Beaunisne  v.  Scholz,  182 
111.  App.  238,  also  Aldham  v.  Brown, 
7  E.  &  B.  164,  affirmed,  2  E.  &  E. 
398. 

In  Beaunisne  v.  Scholz,  parol  evi- 
dence was  admitted  to  show  the  real 
agreement  of  the  parties. 

19.  Sproat  v.  Porter,  9  Mass.  300. 
The  agent  was,  in  this  case,  allowed 
to  recover  even  against  those  sub- 
scribers   who    did    not    attend    the 
meeting. 

20.  18  L.   J.  Ch.  N.   S.   409.     Cf. 
Williams  v.  Salmond,  2  K.  &  J.  463, 
470,  discussed  in  §  328,  post.     See 
also  post,   §   329,   and  see  ante,   § 
318n. 


ABORTIVE  PROMOTIONS. 


567 


the  expenses  of  the  attempted  organization  of  the  company,  they 
are  not  protected  from  further  liability  by  the  fact  that  the  pro- 
moters rendered  their  accounts,  distributed  the  balance  of  the 
deposits  remaining  in  their  hands  and  were,  by  the  subscribers, 
released  from  further  liability,  as  it  does  not  necessarily  follow 
that  because  a  subscriber  has  released  the  promoters,  the  pro- 
moters have  in  turn  released  the  subscriber. 

§  321.  Repayment  of  subscribers'  deposits. 

As  the  subscribers  are  not  liable  for  the  expenses  of  the  abortive 
promotion,  they  are  upon  the  abandonment  thereof  entitled  to 
recover  any  sums  paid  by  them  as  deposits  upon  their  shares,21 
without  any  deduction  for  services  rendered  or  expenses  in- 
curred.22 It  has  even  been  said  that  the  subscribers  are  entitled 


21.  California. — Rose  v.  Foord,  96 
Cal.  152,  30  Pac.  1114. 

Illinois. — Fitzwilliam  v.  Travis,  65 
111.  App.  183 ;  Watson  v.  Donald,  142 
111.  App.  110. 

Minnesota. — Jacobson  v.  McCul- 
lough,  113  Minn.  332,  129  N.  W.  759 ; 
.  cf.  Clark  v.  McManus,  105  Minn. 
Ill,  117  N.  W.  476. 

Missouri — Reyburn  v.  Bennett, 
176  Mo.  App.  451,  158  S.  W.  474. 

Pennsylvania. — Hudson  v.  West, 
189  Pa.  491,  42  Atl.  190;  Lleb  v. 
Painter,  42  Pa.  Super.  Ct.  399. 

Washington. — Miller  v.  Denman, 
49  Wash.  217,  222,  95  Pac.  67,  16 
L.  R.  A.  N.  S.  348. 

United  Kingdom  and  Colonies.— 
Hutton  v.  Thompson,  3  H.  L.  Gas. 
161,  191-192 ;  Landman  v.  Entwistle, 
7  Exch.  632;  Jarrett  v.  Kennedy,  6 
C.  B.  319;  Nockells  v.  Crosby,  3  B. 
&  C.  814,  5  I).  &  R.  751;  Baird  v. 
Ross,  2  Macq.  61,  68-69;  Vollans  v. 
Fletcher,  1  Exch.  20,  and  see  John- 


son v.  Goslett,  18  C.  B.  728,  affirmed, 
3  C.  B.  N.  S.  569. 

It  is  held  in  Orr  v.  McLeay,  6  Ga. 
App.  417,  65  S.  E.  164,  that  this  is 
not  so  if  the  subscriber  purchased 
his  stock,  not  from  the  promoters, 
individually,  but  from  the  dc  facto- 
corporation  which  they  had  suc- 
ceeded In  organizing,  and  which  they 
represented  as  officers. 

For  cases  relating  to  so-called 
"  bubble "  companies,  see  Colt  v. 
Woollaston,  2  P.  Wms.  154;  Green 
v.  Barrett,  1  Sim.  45 ;  Harvey  v.  Col- 
lett,  15  Sim.  332,  15  L.  J.  Ch.  N.  S. 
376,  10  Jur.  603.  See  Moffat  v. 
Winslow,  7  Paige's  Ch.  (N.  Y.)  124. 

22.  Hudson  v.  West,  189  Pa.  St 
491,  42  Atl.  190;  Miller  v.  Denman, 
49  Wash.  217,  223,  95  Pac.  67,  16 
L.  R.  A.  N.  S.  348,  351,  and  CMtt 
cited. 

Landman  v.  Entwistle,  7  Exch. 
632;  Nockells  v.  Crosby,  3  B.  A  C. 
814.  5  D.  &  R.  751;  Walstab  v. 


568  THE  LAW  OF  PROMOTERS. 

to  interest  upon  their  deposits.23  To  compel  the  promoters  to 
pay  interest  upon  moneys  deposited  by  the  subscribers  would, 
ordinarily,  be  unreasonable.  Interest  should  be  allowed  only 
after  a  lawful  demand  and  the  promoters'  refusal  to  repay  the  de- 
posits, or  from  the  date  when  the  promoters  should,  in  fairness, 
have  announced  the  abandonment  of  the  proposed  corporation 
and  returned  the  deposits  to  the  subscribers.24 

§  322.  The    same    subject. — Circumstances    under    which    ex- 
penses may  be  deducted. 

While  the  expenses  of  an  unsuccessful  attempt  to  organize  a 
corporation  are  in  general  to  be  borne  by  the  promoters  and  can- 
not be  deducted  from  the  deposits  made  by  the  subscribers,  such 
deposits  may  be  applied  to  the  payment  of  expenses  if  a  provision 
to  that  effect  is  contained  in  the  prospectus,  the  notice  of  allot- 
ment, or  in  the  subscription  agreement.25  The  deposits  may  also 
be  subjected  to  the  payment  of  the  expenses  of  the  unsuccessful 
promotion  if  the  agreement  of  the  parties  can  fairly  be  construed 
as  an  agreement  to  join  the  promoters  in  the  enterprise  of  form- 
ing the  company,  rather  than  an  agreement  to  take  shares  in  the 
fully  organized  corporation.26 

Spottiswoode,  15  M.  &  W.  501 ;  Cap-  L.  J.  Exch.  15 ;  Ashpitel  v.  Sercombe, 

per's  Case,  1  Sim.  N.  S.  178,  184,  5  Exch.  147,  19  L.  J.  Exch.  N.  S. 

citing  Ashpitel  v.  Sercombe,  5  Exch.  82,  6  Ry.  Gas.  224 ;  Jones  v.  Harri- 

147,  19  L.  J.  Exch.  N.  S.  82,  6  Ry.  son,  2  Exch.  52,  12  Jur.  122,  5  Ry. 

Cas.  224 ;  Baird  v.  Ross,  2  Macq.  61,  Gas.  138 ;  Willey  v.  Parratt,  3  Exch. 

68-69,  and  see  Hutton  v.  Thompson,  211,  18  L.  J.  Exch.  N.  S.  82,  6  Ry. 

3  H.  L.  Cas.  161,  191-192.  Cas.  32 ;  Watts  v.  Salter,  10  C.  B. 

See  also  cases  cited  under  note  21.  477,  20  L.  J.  C.  P.  43 ;  Garwood  v. 

But  compare  Brackbill  v.  Bucher,  Ede,  1  Exch.  264 ;  Clements  v.  Todd, 

19  Lane.  Law.  Rev.  414.  1  Exch.  268,  17  L.  J.  Exch.  31,  5  Ry. 

23.  Jacobson  v.  McCullough,  113  Cas.  132. 

Minn.  332,  339,  129  N.  W.  759.  26.  See    perhaps    Clark    v.    Mc- 

24.  See  Mowatt  v.  Lord  Londes-  Manus,   105   Minn.   Ill,   117   N.   W. 
borough,  4  E.  &  B.  1,  12.  476;   also  Aldham   v.   Brown,   7  E. 

25.  Baird   v.    Ross,    2   Macq.   61 ;  &  B.  164,  affirmed,  2  E.  &  E.  398. 
Moore  v.  Garwood,  4  Exch.  681,  19 


ABORTIVE  PROMOTIONS. 

A  curious  case  of  contradictory  agreements  arose  in  the  litiga- 
tions resulting  from  the  attempted  organization  of  the  Dover  & 
Deal  Railway  Company.  The  agreement  signed  by  the  subscrib- 
ers of  the  contemplated  company  provided  that  whether  or  not 
the  company  obtained  its  act  of  incorporation,  the  expenses  of 
the  provisional  directors  in  obtaining,  or  endeavoring  to  obtain, 
the  act  should  be  borne  by  the  subscribers  ratably.  A  letter 
stating  that  the  directors  undertook,  in  the  event  that  the  act 
was  not  obtained,  to  return  the  whole  of  the  deposits  without  de- 
duction had,  however,  been  made  public.  It  was  held  that  those 
who  signed  the  subscription  agreement  on  the  faith  of  the  letter 
were,  as  between  themselves  and  the  directors  who  signed  or  sanc- 
tioned it,  not  liable  for  the  expenses  of  the  attempted  incorpora- 
tion.27 

§  323.  Liability  upon  subscription  notes. 

As  the  subscriber  is  upon  the  abandonment  of  the  corporate 
scheme  released  from  liability  upon  his  subscription,  his  notes* 
given  in  payment  for  the  shares  to  be  delivered  to  him  are  unen- 
forceable if  the  promotion  proves  to  be  abortive,  unless  in  the 
hands  of  a  bona  fide  holder  for  value  without  notice.28 

It  was,  however,  held  in  Duke  v.  Dive  29  that  a  subscriber,  who 
before  the  abandonment  of  the  enterprise  makes  default  in  the 
payment  of  his  subscription,  is  not  released  from  liability  for 
his  breach  of  contract  by  the  subsequent  abandonment  of  the 

27.  Ex  parte  Mowatt  &  Elliott,  3  28.  Howe  v.  Raymond,  74  Conn. 

DeG.  M.  &  G.  254,  22  L.  J.  Ch.  N.  68,  49  Atl.  864 ;  Bradford  v.  Harris, 

S.   578,   17   Jur.  356,  reversing,  Ex  11    Md.    153,    26    Atl.    186;    North- 

parte  Mowatt,  1  Drew.  247 ;  Mowatt  western  Creamery  Co.  v.  Lanning,  83 

v.  Lord  Londesborough,  3  E.  &  B.  Minn.  19,  85  N.  W.  823. 

307,  affirmed,  4  E.  &  B.  1.     See  also  29.  1    Exch.    36.      See    Duke    v. 

Ward  v.  Lord  Londesborough,  12  C.  Forbes,  1  Exch.  356;  cf.  Broadus  r. 

B.    252;    Ex    parte    Beardshaw,    1  Russell,   160  Ala.   353,  359,  49   Sa 

Drew.  226;  Ex  parte  Londesborough,  327,  329;   Edwards  v.  Johnston,  — 

4  DeG.  M.  &  G.  411,  22  L.  J.  Ch.  N.  Wyo.  — ,  152  Pac.  273. 
S.   736. 


570  THE  LAW  OF  PROMOTERS. 

contemplated  corporation.  The  justice  of  holding  the  subscriber 
liable  in  such  case  is,  in  the  absence  of  evidence  that  the  abandon- 
ment of  the  scheme  was  to  some  extent  at  least  due  to  his  failure 
to  comply  with  the  terms  of  his  subscription,  open  to  serious 
question. 

§  324.    Proof  of  abandonment  of  promotion. 

The  burden  is  upon  a  subscriber,  claiming  that  the  proposed 
corporation  has  proved  abortive  and  demanding  a*  release  from 
liability  on  his  subscription  or  the  return  of  the  payments  made 
thereon,  to  prove  that  the  contemplated  company  has  been  aban- 
doned 30  or  that  circumstances  have  arisen  which  render  the  com- 
pletion of  the  corporate  organization  impossible/31  If  no  time  for 
the  complete  organization  of  the  company  is  fixed  by  agreement, 
the  company  must  be  organized  within  a  reasonable  time,32  and 
the  plaintiff,  by  showing  that  a  reasonable  time  has  expired  and 
that  the  organization  has  not  been  completed,  establishes  at 
least  a  prima  facie  case  of  abandonment.33  A  mere  temporary 
cessation  in  the  work  of  organizing  the  corporation  or  build- 
ing its  plant  does  not  prove  the  abandonment  of  the  scheme, 
nor  release  the  subscribers  from  liability  upon  their  subscrip- 
tions.34 It  has  been  held  that  advice  received  from  the  promoters 
that  a  statement  of  their  accounts  is  to  be  made  and  the  surplus  of 
the  deposits  divided,  is  sufficient  evidence  to  go  to  the  jury  upon 
the  question  of  the  abandonment  of  the  promotion.35 

The   actual   allotment  of  shares   is   not  necessarily   conclusive 

30.  See  Hayes  v.  Stirling,  14  IT.  4  Exch.  403;  Jarrett  v.  Kennedy,  6, 
Com.   L.   R.  277.  C.  B.  319,  326. 

31.  Watson    v.    Donald,    142    111.          34.  Buffalo  &   Jamestown   R.   R. 
App.  110.  Co.   v.   Gifford,   87  N.   Y.   294.      See 

32.  Beaunisne  v.   Scholz,  182  111.  note  to  Huster  v.  Newkirk  Creamery 
App.  238;  Hudson  v.  West,  189  Pa.  &  Ice  Co.,  L.  R.  A.  N.   S.,  1915  A. 
St.  491,  42  Atl.  190.  390. 

33.  Hudson  v.  West,  189  Pa.  St.          35.  Walstab   v.    Spottiswoode,   15 
491,  42  Atl.  190;  Chaplin  v.  Clarke,  M.  &  W.  501,  515. 


ABORTIVE  PROMOTIONS. 


571 


upon  a  subscriber  alleging  the  abandonment  of  the  contemplated 
corporation.  If  the  corporation  as  organized  does  not  substan- 
tially conform  to  that  described  in  the  prospectus  the  allotment 
of  shares  is  not  a  performance  of  the  agreement  of  the  parties, 
and  the  subscribers  are  released  from  their  subscriptions.30  If 
there  is  such  a  variance  between  the  company  as  organized,  and 
the  company  as  described  in  the  prospectus,  that  it  may  fairly  be 
said  that  there  is  a  difference  in  the  substance  of  the  shares  bar- 
gained for  and  those  allotted,  the  subscriptions  made  upon  the 
faith  of  the  prospectus  may  be  rescinded.3"  A  mere  variance  in 
detail  will,  however,  be  disregarded.38 


36.  Walstab   v.    Spottiswoode,   15 
M.  &  W.  501,  515. 

37.  Alabama. — Knox   v.  Childers- 
burg  Land  Co.,  86  Ala.  180,  5  So. 
578. 

California. — Marysville  Elec.  L. 
&  P.  Co.  v.  Johnson,  109  Cal.  192, 
41  Pac.  1016,  50  Am.  St.  Rep.  34. 

Iowa. — Lawrence  y.  Smith,  57 
Iowa,  701,  11  N.  W.  674;  Cooper  v. 
McKee,  53  Iowa  239,  5  N.  W.  121. 

New  York. — Woods  Motor  Vehicle 
Co.  v.  Brady,  181  N.  Y.  145,  73  N.  E. 
674,  (reargument  denied,  LSI  N.  Y. 
554,  74  N.  E.  1128)  ;  Stern  v.  McKee, 
70  App.  Div.  142,  75  Supp.  157 ;  Bur- 
rows v.  Smith,  10  N.  Y.  550. 

Virginia. — Norwich  Lock  Mfg.  Co. 
v.  Hockaday,  89  Va.  557,  16  S.  E. 
877,  and  cases  cited. 

West  Virginia. — Greenbrier  Indus- 
trial Exposition  v.  Rodes,  37  W.  Va. 
738,  17  S.  E.  305;  West  End  Real 
Estate  Co.  v.  Nash,  51  W.  Va.  341, 
41  S.  E.  182;  Clarksburg,  etc.,  Land 
Co.  v.  Davis,  —  W.  Va.  — ,  86  S.  E. 
929. 

United  Kingdom  and  Colonies. — 
Fox's  Case,  L.  R.  5  Eq.  118 ;  Wilkin- 


son's Case,  L.  R.  2  Ch.  App.  536,  12 
W.  R.  499;  Stewart's  Case.  L.  R.  1 
Ch.  App.  574 ;  Lawrence's  Case,  L. 
R.  2  Ch.  App.  412,  422:  Webster's 
Case,  L.  R.  2  Eq.  741 ;  Ship's  Case, 

2  DeG.   J.   &   S.   544,  affirmed,  sub 
wow.  Downes  v.  Ship,  L.  R.  3  II.  L. 
343,  (see  Ship  v.  Crosskill,  L.  R.  10 
Eq.  73,  82-K3)  ;  Ef  parte  Rye,  3  Jur. 
N.  S.  400;  Goldsmid's  Case.  16  Beav. 
262;  Meyer's  Case,  16  Reav.  3<*3.  and 
see  Hayes  v.  Stirling,  14  Ir.  Com.  L. 
Rep.  277. 

Cf.  Armstrong  v.  Dannhy.  7.*>  Hun 
(N.  Y.)  405,  56  St.  Rep.  743,  27 
Supp.  60. 

As  to  the  recovery  of  deposits 
paid,  see  Stewart  v.  Austin.  L.  R. 

3  Eq.    299,    but    compare    Ship    v. 
Crosskill,  L.  R.  10  Eq.  73,  and  cases 
cited  alnive. 

A  subscriber  desiring  to  rescind 
on  the  ground  of  variance  between 
the  proposed  corporation  as  do- 
scribed  to  him,  and  that  actually 
organized,  must  act  with  due  dili- 
gence. Jackson's  Case,  16  L.  T.  N. 
S.  27S  ;  KOO  also  the  cases  cited  above 
and  see  ante,  §§  258,  260,  261. 


572 


THE  LAW  OF  PROMOTERS. 


§  325.  All  promoters  not  necessarily  liable  for  return  of  de- 
posits. 
While  the  subscribers  are,  in  case  of  the  corporate  scheme  prov- 


The  objection  is  waived  by  attend- 
ance at  meetings,  or  the  payment 
of  the  subscription.  Greenbrier  Ind. 
Exp.  v.  Squires,  40  W.  Va.  307,  21 
S.  E.  1015,  52  Am.  St.  Rep.  884,  and 
cases  cited. 

It  is  said  in  Ross  v.  Estates  In- 
vestment Co.,  L.  R.  3  Eq.  122,  132, 
(affirmed,  L.  R.  3  Ch.  App.  682), 
that  a  rescission,  on  the  ground  of 
variance  between  the  company  as 
organized  and  that  described  in  the 
prospectus,  does  not  lie  if  the  or- 
ganization was  completed  before  the 
prospectus  was  issued.  A  rescission 
might,  in  such  case,  be  had  on  the 
ground  of  misrepresentation. 

If  the  promoters  use  the  sub- 
scriber's money  in  the  formation  of 
a  company  other  than  that  in  which 
they  allot  him  shares,  the  subscriber 
may,  instead  of  rescinding,  follow 
his  money  and  compel  the  promoters 
to  allot  to  him  shares  of  the  com- 
pany into  which  his  money  has  gone. 
Butt  v.  Monteaux,  1  K.  &  J.  98. 

If  the  corporation  formed  is  the 
one  contemplated  in  the  subscrip- 
tion agreement,  the  subscriptions 
may  be  enforced  though  the  corpo- 
ration was  organized  in  part  by  per- 
sons who  were  not  parties  to  the 
agreement.  Ferrochem  Co.  v.  Dan- 
ziger,  23  Cal.  App.  584,  138  Pac.  966. 

It  was  held  in  Warner,  etc.,  En- 
gineering Co.,  Ltd.,  v.  Kilburn,  110 
L.  T.  N.  S.  456,  30  T.  L.  R.  284,  1914 
W.  N.  61,  that  an  underwriter  who 
had  agreed  that  his  obligation  was 


to  hold  good  notwithstanding  any 
variation  between  the  draft  pros- 
pectus submitted  to  him  and  the 
prospectus  as  finally  published,  was 
nevertheless  released  by  a  material 
alteration  in  the  character  of  the 
company  agreed  to  be  formed. 

38.  California. — Mahan  v.  Wood, 
44  Cal.  462. 

Michigan. — Mich.  Midland  and 
Can.  R.  R.  Co.  v.  Bacon,  33  Mich. 
466. 

Missouri. — Haskell  v.  Worthing- 
ton,  94  Mo.  560,  7  S.  W.  481;  Has- 
kell v.  Sells,  14  Mo.  App.  91. 

New  Jersey. — Braddock  v.  Phila. 
M.  &  M.  R.  R.  Co.,  45  N.  J.  L.  363. 

New  York. — Yonkers  Gazette  Co. 
v.  Taylor,  30  App.  Div.  334,  5  N.  Y. 
Ann.  Cas.  384,  51  Supp.  969 ;  Kelsey 
v.  Northern  Light  Oil  Co.,  54  Barb. 
Ill,  affirmed,  45  N.  Y.  505,  and  see 
Jewell  v.  Mclntyre,  62  App.  Div. 
396,  70  Supp.  826,  affirmed  on  opin- 
ion below,  172  N.  Y.  638,  65  N.  E. 
1118. 

United  Kingdom  and  Colonies. — 
Lyon's  Case,  35  Beav.  646;  Midland 
Ry.  Co.  v.  Gordon,  16  M.  &  W.  804 ; 
Kennedy  v.  Panama,  etc.,  Mail  Co., 
L.  R.  2  Q.  B.  580;  Norman  v.  Mit- 
chell, 5  DeG.  M.  &  G.  648. 

Compare,  however,  Stevens  v. 
Ambler,  39  Fla.  575,  23  So.  10. 

It  has  been  held  that  if  a  railroad 
company  is  organized  in  accordance 
with  the  plan  described  in  the  sub- 
scription agreement,  the  fact  that 
the  directors,  in  building  the  rail- 


ABORTIVE  PROMOTIONS. 


573 


ing  abortive,  entitled  to  recover  the  money  deposited  by  them 
upon  their  subscriptions,39  it  does  not  follow  that  all  of  the  pro- 
motors  are  jointly  liable  for  the  return  of  such  money.  To  hold 
any  promoter  liable  it  must  be  shown  that  the  money  in  question 
was  actually  received  by  him,40  or  by  some  depositary  or  agent 
authorized  to  receive  it  on  his  behalf.41 

§  326.  Recovery  from  depositary. 

It  is  held  in  Moseley  v.  Cressey's  Co.42  that  the  subscribers  for 
the  shares  of  an  abortive  company  are  not  entitled  to  follow  the 
moneys  paid  on  account  of  their  subscriptions,  into  the  hands  of 
a  bank  in  which  the  moneys  are  deposited  to  the  credit  of  the 
company,  and  there  impress  these  moneys  with  a  lien  superior  to 
the  rights  of  the  creditors  of  the  company. 


road,  depart  from  the  route  fixed  by 
the  charter,  is  not  a  ground  for  the 
rescission  of  subscriptions,  but  that 
the  subscribers'  remedy  is  an  appli- 
cation for  an  injunction  restraining 
the  violation  of  the  corporate  char- 
tei^  Mississippi,  etc.,  R.  R.  v.  Cross, 
20  Ark.  443,  452-453.  If,  however, 
the  route  is  fixed,  not  by  the  char- 
ter, but  by  the  subscription  agree- 
ment, a  departure  therefrom  is 
ground  for  the  rescission  of  the  sub- 
scriptions. Moore  v.  Hanover  Junc- 
tion R.  R.  Co.,  94  Pa.  324;  Stevens 
v.  Ambler,  39  Fla.  575,  23  So.  10; 
Martin  v.  Pensacola  &  Georgia  R. 
R.  Co.,  8  Fla.  370,  73  Am.  Dec.  713. 
Specific  performance  of  the  agree- 
ment to  locate  the  route  was  re- 
fused because  of  indefiniteness,  in 
Park  v.  Minneapolis,  St.  Paul,  etc., 
Ry.  Co.,  114  Wis.  347,  89  N.  W.  532. 

39.  See  ante,  §  321,  et  »eq. 

40.  Hays  v.  Stirling,  14  Ir.  Com. 
L.  R.  277;  Burnside  v.  Dayrell,  3 


Exch.  224,  6  Ry.  Cas.  67,  19  L.  J. 
Exch.  46 ;  Watson  v.  Earl  of  Charle- 
mont,  12  Ad.  &  El.  N.  S.  856,  13 
Jur.  117;  see  Drouet  v.  Taylor,  16 
C.  B.  671. 

See  Perry  v.  Hale,  143  Mass.  540, 
10  N.  E.  174,  where  the  plaintiff 
subscriber  attempted  to  hold  all 
those  who  acted  as  stockholders  of 
the  abortive  company  liable  as  part- 
ners. 

It  has  been  said  that  such  pro- 
moters as  are  connected  with  the  re- 
ceipt of  the  subscriber's  deposit  are 
jointly  liable.  Newton  v.  Blunt,  3 
C.  B.  675. 

41.  Fitzwilliam  v.  Travis,  65  111. 
App.   183,   188-189;    Moore  v.   Gar- 
wood,  4   Exch.  681,  19  L.  J.   Exch. 
15,    19;    Hayes    v.    Stirling,    14    Ir. 
Com.  L.  R.  277;  Walstab  v.  Spottis- 
woode,  15  M.  &  W.  501 ;  cf.  Burnside 
v.  Dayrell,  3  Exch.  224,  6  Ry.  Cas. 
67,  19  L.  J.  Exch.  46. 

42.  L.  R.  1  Eq.  405. 


574  THE  LAW  OF  PROMOTERS. 

§  327.  Rights  of  purchasers  of  shares  of  abortive  corporation. 

The  rights  of  a  party  who  had  contracted  to  purchase  from  a 
subscriber,  shares  of  a  company  which  proved  abortive,  are  neces- 
sarily somewhat  different  from  those  of  an  original  subscriber  for 
the  shares. 

It  is  held  in  Kempson  v.  Saunders  43  that  one  who  has  pur- 
chased, or  agreed  to  purchase,  from  the  supposed  equitable  owner 
thereof,  shares  of  a  company  to  be  formed,  may,  upon  the  organ- 
ization of  the  company  being  abandoned,  sue  his  vendor  for  the 
moneys  paid  him  leaving  the  vendor  to  proceed  in  turn  against  his 
vendor  until  the  original  promoters  are  ultimately  reached. 

§  328.  Subscriber's  action  for  recovery  of  deposit. 

The  remedy  to  be  pursued  by  a  subscriber  seeking  to  recover 
his  deposit  depends  upon  whether  the  deposit  is  subject  to  deduc- 
tion for  the  expenses  of  the  attempted  promotion.  If  the  deposit 
was  simply  a  payment'  on  account  of  the  purchase  price  of  the 
shares  of  a  company  to  be  organized,  and  there  are  no  circum- 
stances which  make  such  deposit  applicable  to  the  payment  of  the 
expenses  of  the  attempted  organization,  the  subscriber  is,  upon 
the  proposed  corporation  proving  abortive,  entitled  to  recover 
his  deposit  on  the  ground  of  failure  of  consideration,  and  his 
remedy  is  an  action  at  law  for  money  had  and  received.44  If, 
on  the  other  hand,  the  circumstances  are  such  as  to  subject  the 
deposit  to  the  payment  of  the  expenses  of  the  attempted  incorpo- 
ration, the  amount  due  the  subscriber  cannot  be  determined  with- 
out a  determination  of  the  expenses  incurred  by  the  promoters, 

43.  4  Bing.  5,  12  Moore  44,  2  C.  &  147,  19  L.  J.  Exch.  N.  S.  82,  6  Ry. 
P.  366.  Gas.  224;  Mowatt  v.  Lord  Londes- 

44.  Hudson  v.  West,  189  Pa.  491,  borough,   4   E.   &   B.    1;   Jarrett   v. 
42  Atl.  190 ;   Denton  v.  Macneil,  L.  Kennedy,  6  C.  B.  319 ;  Moore  v.  Gar- 
R.  2  Eq.  352,  356 ;    Nockells  v.  Crosby,  wood,  4  Exch.  681,  19  L.  J.  Exch.  N. 
3  B.  &  C.  814,  5  D.  &  R.  751;  Wai-  S.  15;  Carrick's  Case,  1  Sim.  N.  S. 
stab  v.   Spottiswoode,  15  M.   &  W.  505;  Hayes  v.  Stirling,  14  Ir.  Com. 
501;  Ashpitel  v.  Sercombe,  5  Exch  L.  R.  277. 


ABORTIVE  PROMOTIONS.  575 

and  the  remedy  of  the  subscriber  is  an  action  in  equity  for  an 
accounting.45 

Resort  to  equity  cannot  be  had  if  the  claim  of  the  subscriber 
is  simply  for  a  return  of  his  deposit  because  of  failure  of  con- 
sideration. He  has  in  such  case  an  adequate  remedy  at  law,  and 
there  is,  it  seems,  no  basis  for  equity  jurisdiction.40 

A  subscriber  suing  the  promoters  for  an  accounting  may,  and 
generally  does,  bring  his  action  on  behalf  of  himself  and  other 
subscribers  similarly  situated.47 

If  the  plaintiff  asserts  that  some  of  the  subscribers  have  re- 
ceived more  than  their  share  of  the  unexpended  deposits,  com- 
plete justice  cannot  be  done  unless  such  subscribers  are  parties 
to  the  suit.  The  interests  of  such  alleged  favored  subscribers  are 
represented  neither  by  the  promoters,  nor  by  the  complaining 
subscriber,  and  a  complete  determination  of  the  controversy  can- 
not be  had  without  their  presence.48  The  fact  that  there  are  sub- 
scribers, other  than  the  promoters,  whose  situation  is  different 
from  that  of  the  plaintiff,  and  whose  interests  are,  or  may  be, 
adverse  to  that  of  the  plaintiff,  does  not  affect  the  plaintiff's  right 

45.  Cooper  v.  Webb,  15  Sim.  454,          47.  Clements   v.   Bowes,   17   Sim. 
4   Ry.    Cas.   582,   11   Jur.   93,   443;  167,  16  Jur.  96,  21  L.  J.  Ch.  N.  S. 
Clements  v.  Bowes,  17  Sim.  167,  16  306;    Clements   v.    Bowes,   1   Drew. 
Jur.   96,   21   L.   J.   Ch.    N.    S.   306;  684;  Cooper  v.  Webb,  15  Sim.  454, 
Clements   v.   Bowes,   1   Drew.   684;  4   Ry.  Cases  5S2,  11  Jur.  93,  443; 
Williams  v.   Page,  24  Beav.  654,  4  Williams  v.   Page,  24  Beav.  654,  4 
Jur.  N.  S.  102,  27  L.  J.  Ch.  N.  S.  425;  Jur.  N.  S.  102,  27  L.  J.  Ch.  N.  S. 
Williams  v.  Salmond,  2  K.  &  J.  463;  425;   Williams  v.  Salmond,  2  K.  & 
Wilson  v.  Stanhope,  2  Coll.  Ch.  Cas.  J.  463 ;  Wilson  v.  Stanhope,  2  Coll. 
629,  10  Jur.  421 ;  Apperly  v.  Page,  Ch.  Cas.  629,  10  Jur.  421 ;  Apperly 
16  L.  J.  Ch.  N.  S.  100,  affirmed,  16  v.  Page,  16  L.  J.  Ch.  N.  S.  100,  af- 
L.  J.  Ch.  N.  S.  302,  1  Phil.  779.  firmed,  16  L.  J.  Ch.  N.  S.  302,  1  Phil. 

46.  See  Denton  v.  Macneil,  L.  R.  779. 

2  Eq.  352,  356;  Ship  v.  Crosskill,  L.  48.  Williams    v.    Page,   24    Beav. 

R   10  Eq.  73,  83 ;  Stewart  v.  Austin,  654,  674-676,  4  Jur.   N.   S.   102,  27 

L    R.  3  Eq.  299;  cf.  Harvey  v.  Col-  L.  J.  Ch.  N.  S.  425;  and  see  Stupart 

lett,  15  Sim.  332,  15  L.  J.  Ch.  N.  S.  v.  Arrowsmith,  3  Sin.  &  G.  176,  182- 
376,  10  Jur.  603. 


576  THE  LAW  OF  PROMOTERS. 

to  an  action  for  an  accounting,  but  such  subscribers  must  be 
made  parties  to  the  suit.49  In  Williams  v.  Salmond,50  the  plaintiff 
brought  suit  against  the  provisional  directors  of  an  abortive  com- 
pany, on  behalf  of  himself  and  all  other  holders  of  shares  except 
the  defendant  directors,  for  an  accounting  of  the  moneys  deposited 
with  them.  Two  dividends  had  previously  been  distributed  by  the 
provisional  directors  and  accepted  by  all  the  subscribers.  A  third 
and  final  dividend  had  been  declared,  and  accepted  by  a  number  of 
the  subscribers.  Other  subscribers,  the  plaintiff  among  them,  re- 
fuse to  accept  this  final  dividend.  The  court  held  that  the  plain- 
tiff had,  by  refusing  the  dividend  and  bringing  suit,  reopened  the 
whole  account,  and  that  it  might  well  appear  that  he  had  already 
been  repaid  too  large  a  part  of  his  deposit ;  that  no  one  of  the  other 
subscribers  on  whose  behalf  the  plaintiff  sued,  could  demand  the 
account  prayed  for  without  reopening  the  entire  account,  and  as 
the  defendants  might  be  entitled  to  an  affirmative  judgment  against 
such  other  subscribers,  they  were  entitled  to  have  all  such  sub- 
scribers substantially  upon  the  record. 

§  329.  The  same  subject. — Voluntary  account  of  promoter  as 

bar  to  subscriber's  action  for  accounting. 

The  subscriber's  action  for  an  accounting  cannot  be  defeated 
by  showing  that  the  promoters  have  already  rendered  a  complete 
statement  of  the  disposition  made  by  them  of  the  deposits,  for  the 
subscriber  is  entitled  to  an  account  taken  with  the  aid  of  the  ma- 
chinery of  the  court,  and  is  not  bound  to  accept  the  promoters' 
voluntary  statement  as  correct.51  If  the  subscriber  has,  without 
objection,  received  the  promoters'  statement  of  accounts  and  ac- 
cepted his  share  of  the  balance  distributed  thereunder,  he  cannot, 

49.  Clements  v.   Bowes,  1  Drew.          50.  2  K.  &  J.  463. 
684;  Williams  v.  Page,  24  Beav.  654,          51.  Clements   v.   Bowes,   17   Sim. 
667,  et  seg.,  4  Jur.  N.  S.  102,  27  L.      167,  16  Jur.  96,  21  L.  J.  Ch.  N.  S. 
J.  Ch.  N.  S.  425.  306 ;   Clements   v.   Bowes,   1   Drew. 

684,  692. 


ABORTIVE  PROMOTIONS.  577 

in  the  absence  of  fraud,  demand  an  accounting  in  equity  after 
allowing  a  considerable  period  of  time  to  elapse.52  A  statement 
of  accounts  accepted  by  the  subscribers  may,  however,  be  set 
aside  and  an  accounting  in  equity  demanded,  if  it  is  shown  that 
the  statement  made  by  the  promoters  was  frauduent  or  unfair  to 
the  subscribers  and  that  there  are  further  moneys  due  to  the 
latter.53  A  subscriber  seeking  to  avoid  the  effect  of  his  accept- 
ance of  a  distribution  made  by  the  promoters,  must  rescind  the 
transaction  in  toto  and  return,  or  offer  to  return,  all  moneys  re- 
ceived by  him  thereunder.64 

It  is  said  in  Williams  v.  Salmond  55  that  the  account  rendered 
by  the  promoters  is  generally  conclusive  against  the  promoters 
as  to  those  subscribers  who  accepted  the  moneys  distributed  there- 
under, but  not  as  to  those  who  refused  to  accept  the  final  payment 
and  demanded  a  further  accounting. 

§  330.  Accounting  by  promoters. — Disbursements  allowable. 

As  the  promoters  are  not  in  the  absence  of  agreement  entitled 
to  charge  their  expenses  against  the  deposits  made  by  the  sub- 
scribers, it  follows  that  the  determination  of  the  nature  of  the 
expenses  that  may  be  credited  to  the  promoters  when  the  de- 
posits are  subject  to  the  payment  of  expenses,  depends  upon  the 
particular  terms  of  the  agreement  relied  upon.  The  necessary 
expenses  of  obtaining  a  charter  and  legally  organizing  the  cor- 
poration would,  however,  in  almost  every  case  be  allowed,  as 

52.  Williams   v.    Page,   24   Beav.  53.  Williams   v.   Pajje,   24   Beav. 

654,  674,  4  Jur.  N.  S.  102,  27  L.  J.  654,  4  Jur.  N.  S.  102,  27  L.  J.  Ch.  N. 

Ch.  N.  S.  425.  S.  425. 

See  also  Stupart  v.  Arrowsmitb,  54.  Grand  Trunk,  etc.,  Ry.  Co.  v. 

3  Sm.  &  G.  176,  where  the  accounts  Brodie,   9   Hare   823;    Williams   v. 

of  the  promoters  had,  some  years  Page,  24  Beav.  654,  673,  4  Jur.  N. 

before,  been  accepted  by  a  majority  S.  102,  27  L.  J.  Ch.  N.  S.  425. 

of  the  subscribers,  but  apparently  55.  2  K.  &  J.  463,  470.     Cf.  Ea 

not  by  the  plaintiff.  parte  Apps,  18  L.  J.  Ch.  N.  S.  409, 

ante,  §  320. 


578 


THE  LAW  OF  PROMOTERS. 


would  the  cost  of  purchasing,  or  obtaining  options  upon,  property 
which  the  corporation  is  organized  to  acquire.  Moneys  paid,  or 
debts  fairly  incurred,  by  the  promoters  for  professional  services 
of  attorneys  and  others  in  the  promotion,  would  also  generally  be 
allowed.  Compensation  for  services  rendered  by  the  promoters 
themselves  would  presumably  be  refused,56  but  if  the  services  so 
rendered  by  the  promoters  were  professional  services,  payment 
for  which  would  otherwise  be  properly  chargeable  against  the 
deposits,  the  propriety  of  such  charge  would  perhaps  not  be 
affected  by  the  circumstance  that  the  party  who  rendered  the 
services  was  himself  one  of  the  promoters.57  There  do  not  seem 
to  be  any  cases  dealing  directly  with  these  questions,  but  the  Eng- 
lish decisions  dealing  with  the  distribution  of  parliamentary  de- 
posits are  suggestive.58 


56.  See  cases  cited,  ante,  §  317. 

57.  See  Muir  v.   Forman's  Trus- 
tees,   Session   Cases,   5   Fraser  546, 
affirming,  Muirkirk,  etc.,  Railways, 
10  Scots  Law  Times  247 ;  Edinburgh 
Northern  Tramways   Co.    v.   Mann, 
Session  Cases,  23  Rettie  1056. 

58.  It  became  the  custom,  at  an 
early  period  in  the  history  of  the  or- 
ganization of  railroads  in  England, 
to  compel  the  promoters  seeking  an 
act     of     Parliament     incorporating 
their  railroad  company,  to  deposit 
securities  or  furnish  bonds  for  the 
completion  of  the  road.    If  the  con- 
templated railway  was  abandoned, 
questions  as  to  the  distribution  to  be 
made   of   such   securities   or   bonds 
arose,  and  the  cases  dealing  there- 
with   have    perhaps    some    bearing 
upon  the  question  of  the  claims  that 
can  be  allowed  against  subscribers' 
deposits. 

The   Railways   Abandonment   Act 
of  1869,  (Stats.  32  and  33  Viet,  Ch. 


114),  provided  in  §  5  "If  the  war- 
rant for  the  abandonment  was  made 
on  condition  that  the  money  de- 
posited as  security  for  the  comple- 
tion of  the  railway,  or  the  stocks, 
funds,  or  securities  in  which  the 
same  is  invested,  or  the  money  se- 
cured by  any  bond  conditioned  for 
the  completion  of  the  railway,  or 
for  payment  of  money  in  default 
thereof,  should  be  applied  as  part 
of  the  assets  of  the  company, 
the  court  may,  if  it  think  fit,  direct 
that  such  money,  stocks,  funds,  and 
securities  shall  not  be  applicable  for 
the  payment  of  any  debt  or  part  of 
a  debt  which,  regard  being  had  to 
what  is  fair  and  reasonable  as  be- 
tween all  the  parties  interested 
under  all  the  circumstances  of  the 
case,  appears  to  the  court  to  have 
been  incurred  on  account  of  the  pro- 
motion of  the  company." 

Under    this    statute    the    bills   of 
solicitors,  (In  re  Barry  Railway  Co., 


ABORTIVE  PROMOTIONS. 


579 


The  application  of  the  subscribers'  deposits  to  the  purchase 
of  properties  other  than  those  to  be  acquired  by  the  contemplated 
corporation  is  obviously  improper,  and  the  subscribers  cannot  be 
charged  with  the  cost  of  such  properties,  unless  such  use  of  their 
deposits  was  expressly  authorized  or  ratified  by  them.59 

§331.  Disposition  of  property  acquired  pending  promotion  of 

abortive  corporation. 

Questions  may  well  arise  as  to  the  ownership  and  disposition 
to  be  made  of  property  acquired  for  the  abortive  corporation. 
It  may  in  general  be  said,  that  such  property  belongs  to  the 
parties  who  have  paid,  or  will  be  made  to  pay,  the  expense  of 


L.  R.  4  Ch.  Div.  315 ;  cf .  In  re  Ken- 
sington Station  Act,  L.  R.  20  Eq. 
197),  and  compensation  for  the 
services  of  the  parliamentary  agent, 
and  claims  for  moneys  advanced  to- 
wards the  expenses  of  carrying  the 
bill  through  Parliament,  (In  re 
Brampton  and  Longtown  Rail- 
way Co.,  L.  R.  10  Eq.  613), 
were  disallowed.  These  cases  turned 
upon  the  words  "  incurred  on  ac- 
count of  the  promotion  of  the 
company."  This  act  of  1869, 
applied  only  to  railways,  sanctioned 
by  acts  passed  before  the  Parlia- 
mentary session  of  1867.  Muir  v. 
Forman's  Trustees,  Session  Cases,  5 
Fraser,  546,  567,  affirming,  Muir- 
kirk,  etc.,  Rys.,  10  Scots  Law  Times, 
247,  251.  See  also  In  re  Lowestoft, 
etc.,  Tramways  Co.,  L.  R.  6  Ch.  Div. 
484,  decided  under  the  Board  of 
Trade  regulations,  and  In  re  Bir- 
mingham and  Lichfleld  Junction  Ry. 
Co.,  L.  R.  28  Ch.  Div.  652,  decided 
under  a  special  act. 

The   Parliamentary  Deposits  and 
Bonds  Act  of  1892,   (Stats.  55  and 


56  Viet.,  Ch.  27),  provided  that  the 
court  might  "  order  that  the  de- 
posit fund  or  any  part  thereof  be 
paid  or  transferred  to  the  receiver 
or  to  the  liquidator  of  the  company, 
or  be  applied  as  part  of  the  assets 
of  the  company  for  the  benefit  of  the 
creditors  thereof."  It  was  held  that 
this  statute  did  away  with  the 
distinctions  made  under  the  act 
of  1869  between  so-called  "  meri- 
torious "  and  "  non-meritorious " 
creditors  and  that  the  debts  of  all 
creditors,  including  solicitors  and 
parliamentary  agents,  were  proper 
charges  against  the  fund.  In  re 
Manchester  M.  &  D.  Tramways  Co., 
1893,  2  Ch.  Div.  638;  Ex  parte  Brad- 
ford and  District  Tramways  Co., 
1893,  3  Ch.  Div.  463.  See  also  In  re 
Hull,  Barnsley  &  West  Riding  Junc- 
tion Railway,  1893  W.  N.  83;  Mulr 
v.  Forman's  Trustees,  Session  Cases, 
5  Fraser  546,  568,  affirming,  Muir 
kirk,  etc..  Railways,  10  Scots  Law 
Times  247. 

59.  Miller  v.   Denman,  49  Wash. 
217,  95  Pac.  67, 16  L.  R.  A.  N.  S.  348. 


580  THE  LAW  OF  PROMOTERS. 

acquiring  it.  Subscribers  disclaiming  liability  for  the  expenses 
of  the  attempted  organization  of  the  corporation  will  certainly 
not  be  heard  to  assert  an  interest  in  property  that  has  been  ac- 
quired. A  mere  subscriber  for  the  shares  of  the  company,  under 
no  agreement  to  share  the  expenses  of  the  attempted  formation  of 
the  company,  who  is  merely  bound  to  pay  for  his  allotted  shares 
when  and  if  issued,  would  not  ordinarily  have  an  option  to  pay  his 
share  of  the  expenses  and  thereby  acquire  an  interest  in  the  prop- 
erty acquired  by  the  promoters.  Promoters  who  are*  not  parties 
to  the  contract  for  the  purchase  of  the  property,  and  who  disclaim 
liability  for  its  cost,  are  clearly  not  entitled  to  an  interest 
therein,  and  a  promoter  demanding  an  interest  in  the  property 
acquired  would  undoubtedly  have  to  pay  his  share,  not  only  of 
the  direct  cost  of  the  property,  but  of  all  of  the  incidental  and 
collateral  expenses  of  the  promotion.  The  disposition  to  be  made 
of  the  property  that  has  been  acquired  by  the  promoters  pending 
the  organization  of  an  abortive  corporation  depends  necessarily 
upon  the  agreement  of  the  parties,  and  upon  their  relation  to  each 
other  and  to  the  transactions  in  question,  and  each  case  must,  as 
it  arises,  be  decided  in  accordance  with  the  equities  of  the  partic- 
ular situation.60 

60.  Illinois. — Flagg  v.  Stowe,  85  443;  Hopper  v.  Hoctor,  35  Can.  S. 

111.  164 ;  Stowe  v.  Flagg,  72  111.  397.  C.  645. 

Kentucky. — Mt.  Carmel  Tel.  Co.  v.  If  a  promoter  represents  to  an 

Mt.  Carmel  &  Flemingburg  Tel.  Co.,  architect  employed  to  draw  plans 

119  Ky.  461,  27  Ky.  L.  Rep.  30,  84  for  the  proposed  company,  that 

S.  W.  515.  land  standing  in  the  name  of  the 

Minnesota. — Jacobson  v.  McCul-  promoter  was  to  be  acquired  by  the 

lough,  113  Minn.  332,  129  N.  W.  759,  corporation,  such  land  may,  if  the 

and  cases  cited.  promoter  has  received  shares  in 

New  York. — Schantz  v.  Oakman,  payment  therefor,  be  treated  as  held 

163  N.  Y.  148,  57  N.  E.  288,  affirming,  in  trust  for  the  corporation  and  sub- 

10  App.  Div.  151,  75  St.  R.  1140,  41  jected  to  the  payments  of  its  debts. 

Supp.  746;  Dyckman  v.  Valiente,  42  The  want  of  legal  organization  of 

N.  Y.  549,  affirming,  43  Barb.  131.  the  company  is  immaterial.  See 

United  Kingdom  and  Colonies. —  Friedman  v.  Janssen,  23  Ky.  L.  R. 

Sylvester  v.  McCuaig,  28  U.  C.  C.  P.  2151,  66  S.  W.  752. 


ABORTIVE  PROMOTIONS. 


581 


§332.  Liability  of  promoters  of  defectively  organized  corpo- 
ration. 

Promoters  who  carry  on  business  in  the  name  of  a  defectively 
organized  corporation  may  sometimes  be  held  liable  as  partners 
for  the  debts  contracted  in  the  name  of  the  company.  The  doc- 
trine supported  by  the  weight  of  authority  is  that  persons  who 
associate  themselves  to  engage  in  business  for  profit  under  any 
name  are  liable  as  partners  for  the  debts  incurred  in  that  name ; 
that  the  limited  liability  of  stockholders  of  corporations  is  an 
exception  to  the  general  rule,  and  that  the  stockholders  come 
within  that  exception  only  if  the  company  in  whose  name  they 
carry  on  business  is  in  fact  a  corporation.61  The  associates  need 


61.  Federal. — Harrlll  v.  Davis, 
168  Fed.  Rep.  187,  94  C.  C.  A.  47, 
22  L.  R.  A.  N.  S.  1153. 

Arkansas. — Garnett  v.  Richardson, 
35  Ark.  144. 

Georgia. — McRee  v.  Quitman  Oil 
Co.,  —  Ga.  — ,  84  S.  E.  487. 

Illinois. — Bigelow  v.  Gregory,  73 
111.  197. 

Iowa. — Kaiser  v.  Lawrence  Sav. 
Bank,  56  Iowa  104,  8  N.  W.  772,  41 
Am.  Rep.  85. 

Kansas. — Central  Nat.  Bank.  v. 
Sheldon,  86  Kan.  460,  121  Pac.  340. 

Louisiana. — In  re  Browne  &  Jen- 
kins Co.,  Ltd.,  106  La.  486,  31  So. 
67 ;  Field  v.  Cooks,  16  La.  Ann.  153. 

Minnesota. — Roberts  Mfg.  Co.  v. 
Schlick,  62  Minn.  332,  64  N.  W.  826. 

Missouri. — Martin  v.  Fewell,  79 
Mo.  401;  Farmers'  State  Bk.  v. 
Kuchs,  163  Mo.  App.  606,  147  S.  W. 
862;  Weir  Furnace  Co.  v.  Bodwell, 
73  Mo.  App.  389;  Davidson  v.  Hob- 
son,  59  Mo.  App.  130. 

Nebraska.— A  b b o 1 1  v.  Omaha 
Smelting  Co.,  4  Neb.  416. 


New  Jersey. — Cottentin  v.  Meyer, 
80  N.  J.  Law  52,  76  AH.  341. 

New  York.— Tuccillo  v.  Plttelli, 
127  Supp.  314. 

Wisconsin — Bergeron  v.  Ilobbs,  96 
Wis.  641,  71  N.  W.  1056,  65  Am.  St 
Rep.  85. 

United  Kingdom  and  Colonies. — 
Seiffert  v.  Irving,  15  Ont.  Rep.  173; 
Gildersleeve  v.  Balfour,  15  Ont  Pr. 
Rep.  293. 

And  see  note  to  Empire  Mills  r. 
Alston  Grocery  Co.,  12  L.  R.  A.  366. 

The  intended  incorporators  of  an 
abortive  corporation  not  intended  to 
be  formed  for  profit,  were  held 
liable,  not  as  co-partners,  but  on  the 
theory  of  agency  in  Johnson  v.  Cor- 
ser,  34  Minn.  355,  25  N.  W.  799,  and 
in  Upton  v.  Corser,  34  Minn.  355,  25 
N.  W.  801. 

Some  authorities  seem  to  sustain 
a  rule  that  one  who  has  contracted 
with  an  abortive  company  as  a  cor- 
poration, will  not,  even  though  no 
de  facto  corporation  ever  existed,  be 
allowed  to  deny  the  corporate  ex- 


582 


THE  LAW  OF  PROMOTERS. 


not,  to  escape  liability,  prove  the  existence  of  a  de  jure  corpora- 
tion.    The  creditor  cannot,  if  there  is  a  corporation  de  facto, 


istence  and  hold  the  stockholders 
liable  as  partners.  (Gartside  Coal 
Co.  v.  Maxwell,  22  Fed.  Rep.  197; 
Magnolia  Shingle  Co.  v.  J.  Zim- 
mern's  Co.,  3  Ala.  App.  578,  58  So. 
90;  Planters  and  Miners  Bank  v. 
Ijadgett,  69  Ga.  159).  Such  a  rule 
is  in  conflict  with  that  established 
by  the  weight  of  authority,  (see 
cases,  supra)  and  must  not  be  con- 
fused with  the  rule  that  one  who 
has  entered  into  a  contract  with  a 
supposed  corporation  as  such,  is 
estopped  from  avoiding  his  obliga- 
tions by  showing  the  want  of  cor- 
porate existence  of  the  opposite 
party.  (This  estoppel  is  peculiarly 
potent  as  against  one  who  himself 
promoted  the  corporation.  See 
Geneva  Mineral  Spring  Co.  v.  Cour- 
sey,  45  N.  Y.  App.  Div.  268,  61 
Supp.  98;  cf.  Doyle  v.  Mizner,  42 
Mich.  332,  3  N.  W.  968).  There  is 
a  plain  distinction  between,  on  the 
one  hand,  forbidding  persons  who 
have  made  engagements  and  reaped 
the  benefit  thereof,  to  avoid  their 
obligations  by  denying  the  legal  ex- 
istence of  the  opposite  party,  and  on 
the  other  hand  allowing  individuals 
who  have  not  even  attempted  to 
comply  with  the  forms  prescribed 
by  statute  and  necessitated  by  pub- 
lic policy,  to  escape  personal  lia- 
bility and  thus  obtain  the  most  sub- 
stantial advantages  of  a  legal 
corporate  organization.  See  Kaiser 
v.  Lawrence  Savings  Bank,  56  Iowa 
104,  108-109,  8  N.  W.  772,  774-775, 
41  Am.  Rep.  85;  Cleaton  v.  Emery, 
49  Mo.  App.  345,  355-356;  see  also 


note  to  Empire  Mills  v.  Alston  Gro- 
cery Co.,  12  L.  R.  A.  366. 

A  partnership  liability  somewhat 
similar  to  that  referred  to  in  the 
text,  but  based  upon  a  very  different 
theory  is  sometimes  cast  upon  the 
promoters,  if  they,  being  members 
of  a  partnership,  organize  a  cor- 
poration to  take  over  the  partner- 
ship business  under  the  same  or 
even  a  different  name,  and  then  pro- 
ceed to  conduct  the  business  for  the 
corporation  without  bringing  home 
to  those  with  whom  they  do  busi- 
ness, notice  of  the  fact  of  their  in- 
corporation. Perkins  v.  Rouss,  78 
Miss.  343,  29  So.  92;  Martin  v. 
Fewell,  79  Mo.  401,  412 ;  Holmes  Re- 
fining Co.  v.  United  Ref.  Exp.  Oil 
Co.,  33  N.  Y.  App.  Div.  62,  53 
Supp.  81;  Tobias  v.  Wierck,  21  N. 
Y.  Misc.  763,  48  Supp.  146,  and 
see  Rust-Owen  Lumber  Co.  v.  Well- 
man,  10  S.  D.  122,  72  N.  W. 
89;  Johns  v.  Brown,  1  Tex.  Ct. 
of  App.  Civ.  Cas.,  §  1016;  Thomp- 
son on  Corporations,  (2nd  ed.), 
§  4753;  Cook  on  Corporations,  (7th 
ed.),  §  243;  cf.  Whitwell  v.  Warner, 
20  Vt.  425. 

It  has  also  been  said  that  if  a 
corporation  is  organized  by  the  pro- 
moters simply  for  the  purpose  of 
consummating  an  illegal  agreement, 
while  shielding  themselves  from  the 
consequences  of  receiving  the  illegal 
exactions  made  thereunder,  the  act 
of  incorporation  does  not  avail 
them  as  a  defense.  Brundred  v. 
Rice,  49  Ohio  St.  640,  32  N.  E.  169, 
34  Am.  St.  Rep.  589. 


ABORTIVE  PROMOTIONS. 


call  its  legal  existence  into  question.62  If  there  be  a  law  under 
which  the  corporation  might  be  organized  de  -jure,  an  attempt  in 
good  faith  to  organize  thereunder,  and  a  user  of  the  assumed 
corporate  powers,  there  is,  according  to  the  weight  of  authority, 
a  corporation  de  facto.63  It  is  sometimes  held  that  to  relieve  the 
associates  from  personal  liability  there  must  be  a  substantial  com- 
pliance with  the  terms  of  the  statute  under  which  the  organization 


62.  Federal. — Harrill  v.  Davis, 
168  Fed.  Rep.  187,  94  C.  C.  A.  47, 
22  L.  R.  A.  N.  S.  1153. 

Alabama. — Snider's  Sons  Co.  v. 
Troy,  91  Ala.  224,  8  So.  658,  24  Am. 
State  Rep.  887,  11  L.  R.  A.  515; 
Cory  v.  Lee,  93  Ala.  468,  8  So.  694 ; 
Owensboro  Wagon  Co.  v.  Bliss,  132 
Ala.  253,  31  So.  81,  90  Am.  St.  Rep. 
907. 

Indian  Territory. — Western  In- 
vestment Co.  v.  Davis,  7  Ind.  Terr. 
152,  104  S.  W.  573,  15  Am.  &  Eng. 
Ann.  Cas.  1134,  and  cases  cited,  (re- 
versed, sub  nom.  Harrill  v.  Davis, 
168  Fed.  Rep.  187,  94  C.  C.  A.  47, 
22  L.  R.  A.  N.  S.  1153. 

Kansas. — Murdock  v.  Lamb,  92 
Kan.  857,  142  Pac.  961. 

Michigan. — Eaton  v.  Walker,  76 
Mich.  579,  43  N.  W.  638,  6  L.  R.  A. 
102,  and  cases  cited. 

Minnesota. — Johnson  v.  Oker- 
strom,  70  Minn.  303,  73  N.  W.  147. 

New  York. — Fox  v.  McComb,  44 
State  Rep.  178,  17  Supp.  783,  63  Hun 
630. 

New  Jersey. — Stout  v.  Zulick,  48 
N.  J.  L.  599,  7  Atl.  362. 

Tennessee. — Merriman  v.  Magiv- 
ney,  12  Heisk.  494 ;  Tennessee  Auto- 
matic Lighting  Co.  v.  Massey,  56  S. 
W.  35. 


Texas. — American  Salt '  Co.  v. 
Heidenheimer,  SO  Tex.  344,  15  S.  W. 
1038,  26  Am.  St.  Rep.  743. 

Utah. — Mitchell  v.  Jensen,  29 
Utah  346,  81  Pac.  165. 

Washington. — American  Radiator 
Co.  v.  Kinnear,  56  Wash.  210,  105 
Pac.  630,  35  L.  R.  A.  N.  S.  453. 

It  has  been  held  that  the  creditor 
may  hold  the  individuals,  if  he  had 
no  knowledge  of  any  attempted  in- 
corporation and  supposed  that  he 
dealt  with  a  co-partnership.  Slocuin 
v.  Head,  105  Wis.  431,  81  N.  W.  673, 
50  L.  R.  A.  324. 

The  organizers  of  a  de  facto  cor- 
poration are  not  liable  for  its  torts. 
Howard  v.  Long,  142  Ga.  789,  83  S. 
E.  852. 

63.  Federal— Harrill  v.  Davis, 
168  Fed.  Rep.  187,  94  C.  C.  A.  47, 
22  L.  R.  A.  N.  S.  1153. 

Alabama. — Snider's  Sons  Co.  v. 
Troy,  91  Ala.  224,  H  So.  658,  24  Am. 
State  Rep.  8K7,  11  L.  R.  A.  515. 

Colorado — .Tones  v.  Aspen  Hdw. 
Co.,  21  Colo.  263,  40  Pac.  457,  29  L. 
R.  A.  143,  52  Am.  St  Rep.  220; 
Humphreys  v.  Mooney,  5  Colo.  282, 
288. 

Florida — Duke  v.  Taylor,  37  Fla. 
64,  19  So.  172,  53  Am.  State  Rep. 
232,  31  L.  R.  A.  484. 


584 


THE  LAW  OF  PROMOTERS. 


of  the  corporation  is  attempted.64  These  general  statements  as 
to  what  constitutes  a  de  facto  corporation  are  of  little  assistance. 
What  constitutes  on  the  one  hand  an  attempt  in  good  faith  to 
organize,  or  on  the  other  a  substantial  compliance  with  the  pro- 
visions of  the  statute,  is  a  matter  of  much  doubt  and  confusion. 
The  authorities  substantially  agree  that  when  the  organization  of 
a  corporation  is  attempted  under  the  provisions  of  a  general  law, 
a  certificate  of  incorporation  must  at  least  be  filed.  The  mere  ex- 
ecution of  a  certificate,  or  the  agreement  of  the  parties, that  they 
exist  as  a  corporation,  is  ineffectual.65  The  filing  of  a  certificate 


Georgia. — Brooke  v.  Day,  129  Ga. 
694,  59  S.  E.  569. 

Illinois. — Bushnell  v.  Consolidated 
Ice  Machine  Co.,  138  111.  67,  27  N.  E. 
596. 

Indiana. — Doty  v.  Patterson,  155 
Ind.  60,  56  N.  E.  668. 

Indian  Territory. — Western  In- 
vestment Co.  v.  Davis,  7  Ind.  Terr. 
152,  175,  104  S.  W.  573,  15  Am.  & 
Eng.  Ann.  Cas.  1134,  and  cases  cited, 
reversed,  sub  nom.  Harrill  v.  Davis, 
168  Fed.  Rep.  187,  94  C.  C.  A.  47, 
22  L.  R.  A.  N.  S.  1153. 

Michigan. — Eaton  v.  Walker,  76 
Mich.  579,  43  N.  W.  638,  6  L.  R.  A. 
102. 

Minnesota. — Finnegan  v.  Knights 
of  Labor  Bldg.  Assoc.,  52  Minn.  239, 
53  N.  W.  1150,  18  L.  R.  A.  778,  38 
Am.  St.  Rep.  552;  Johnson  v.  Oker- 
strom,  70  Minn.  303,  73  N.  W.  147. 

Nebraska. — Abbott  v.  Omaha 
Smelting  Co.,  4  Neb.  416. 

New  Jersey. — Stout  v.  Zulick,  48 
N.  J.  L.  599,  7  Atl.  362;  Vanneman 
v.  Young,  52  N.  J.  L.  403,  20  Atl.  53. 

New  York. — Methodist  Episcopal 
Church  v.  Pickett,  19  N.  Y.  482. 

Tennessee. — Tennessee    Automatic 


Lighting  Co.  v.  Massey,  56  S.  W. 
35 ;  Merriman  v.  Magivney,  12 
Heisk.  494. 

Utah. — Mitchell  v.  Jensen,  29 
Utah  346,  81  Pac.  165. 

See  cases  cited  in  dissenting  opin- 
ion in  Bergeron  v.  Hobbs,  96  Wis. 
641,  71  N.  W.  1056,  65  Am.  St.  Rep. 
85;  in  Western  Investment  Co.  v. 
Davis,  7  Ind.  Terr.  152,  104  S.  W. 
573,  15  Am.  &  Eng.  Ann.  Cas.  1134; 
and  in  note  to  Marshall  v.  Keach, 
118  Am.  St.  Rep.  253. 

64.  Kaiser   v.    Lawrence   Savings 
Bank,  56  Iowa  104,  8  N.  W.  772,  41 
Am.  Rep.  85;  Field  v.  Cooks,  16  La. 
Ann.    153;    Williams  v.    Hewitt,   47 
La.  Ann.  1076,  17   So.  496,  49  Am. 
State  Rep.   394;    Abbott  v.    Omaha 
Smelting  Co.,  4  Neb.  416,  423 ;  Bar- 
tholomew v.  Bentley,  1  Ohio  St.  37, 
41. 

65.  Federal. — Harrill     v.     Davis, 
168  Fed.  Rep.  187,  193,  94  C.  C.  A. 
47,  22  L.  R.  A.  N.  S.  1153. 

Arkansas. — Garnett  v.  Richard- 
son, 35  Ark.  144. 

Colorado. — Jones  v.  Aspen  Hard- 
ware Co.,  21  Colo.  263,  40  Pac.  457, 
29  L.  R.  A.  143,  52  Am.  St.  Rep.  220. 


ABORTIVE  PROMOTIONS. 


585 


seems  to  be  uniformly  considered  a  condition  precedent  to  the 
existence  of  a  corporation  either  de  jure  or  de  facto,  but  whether 
any  particular  provision  as  to  the  contents  or  execution  of  such 
certificate,  or  any  other  requirement  of  the  statute,  is  to  be 
deemed  a  matter  of  substance — a  compliance  with  which  is  a 
condition  precedent  to  the  existence  of  the  corporation — or  a  mere 
mattdr  of  form,  is  a  question  that  depends  upon  the  phraseology 
and  interpretation  of  the  particular  statute,  and  upon  which 
there  is  no  uniformity  of  decision.66 


Georgia. — Meinhard,  Schaul  &  Co. 
v.  Bedingfield  Mercantile  Co.,  4  Ga. 
App.  176,  61  S.  E.  34. 

Illinois. — Bigelow  v.  Gregory,  73 
111.  197. 

Minnesota. — Johnson  v.  Corser,  34 
Minn.  355,  25  N.  W.  799;  Upton  v. 
same,  34  Minn.  355,  25  N.  W.  801; 
Finnegan  v.  Knights  of  Labor  Bldg. 
Assoc.,  52  Minn.  239,  53  N.  W.  1150, 
18  L.  R.  A.  778,  38  Am.  St.  Rep. 
552. 

Nebraska. — Abbott  v.  Omaha 
Smelting  Co.,  4  Neb.  416. 

New  York.— Tuccillo  v.  Pittelli, 
127  Supp.  314. 

Texas. — Bank  of  DeSoto  v.  Reed, 
50  Tex.  Civ.  App.  102,  109  S.  W. 
256;  American  Salt  Co.  v.  Heiden- 
heimer,  80  Tex.  344,  349,  15  S.  W. 
1038,  1039-1040,  26  Am.  St.  Rep.  743, 
and  cases  cited. 

Wisconsin. — Bergeron  v.  Hobbs,  96 
Wis.  641,  71  N.  W.  1056,  65  Am.  St 
Rep.  85. 

It  is  held  in  the  case  last  cited 
that  the  recording  of  a  certificate  of 
incorporation  is  not  a  compliance 
with  a  statute  requiring  its  filing. 

66.  Federal. — Wechselberg  v. 
Flour  City  Natl.  Bank,  64  Fed.  Rep. 


90,  12  C.  C.  A.  56,  24  U.  S.  App. 
308,  26  L.  R.  A.  470. 

Alabama. — Owensboro  Wagon  Co. 
v.  Bliss,  132  Ala.  253,  31  So.  81,  90 
Am.  St.  Rep.  907. 

Arkansas. — Conner  v.  Abbott,  35 
Ark.  365. 

California. — Mokelumne,  etc.,  Co. 
v.  Woodbury,  14  Cal.  424,  73  Am. 
Dec.  658. 

Florida. — Humphreys  v.  Drew,  59 
Fla.  295,  52  So.  362. 

Illinois — Bigelow  v.  Gregory,  73 
111.  197;  Bushnell  v.  Consolidated 
Ice  Machine  Co.,  138  111.  67,  27  N. 
E.  596 ;  Seeberger  v.  McCormlck,  178 
111.  404,  53  N.  E.  340,  writ  of  error 
dismissed,  175  U.  S.  274,  44  L.  Ed. 
161,  20  Sup.  Ct  128. 

Iowa. — Kaiser  v.  Lawrence  Sav- 
ings Bk.,  56  la.  104,  8  N.  W.  772, 
41  Am.  Rep.  85. 

Kansas. — Central  Nat.  Bank  v. 
Sheldon,  86  Kan.  460,  121  Pac.  340. 

Louisiana. — Williams  v.  Hewitt, 
47  La.  Ann.  1076,  17  So.  496,  49  Am. 
State  Reports,  394. 

Missouri.— Hurt  v.  Salisbury,  55 
Mo.  310. 

Neic  York. — Jessup  v.  Carnegie, 
80  N.  Y.  441,  36  Am.  Rep.  643,  re- 


586 


THE  LAW  OF  PROMOTERS. 


When  it  has  been  determined  that  there  is  no  de  facto  corpora- 
tion sufficient  to  protect  the  associates  from  personal  liability  for 
the  debts  contracted  in  the  name  of  the  company,  it  does  not  nec- 
essarily follow  that  all  the  promoters  and  shareholders  are  jointly 
liable;  therefor.  A  subscriber  does  not,  by  agreeing  to  become  a 
shareholder  in  a  corporation  to  be  organized  to  carry  on  a  par- 
ticular business,  agree  that  he  will,  in  case  the  organization  of 
the  corporation  is  abandoned,  become  a  member  of  any  partner- 
ship or  association  which  may  conduct  the  contemplated  business. 
It  is  one  thing  to  become  a  shareholder  of  a  limited  liability  cor- 
poration, another  to  become  a  member  of  a  partnership.  To  hold 
one  liable  for  the  debts  of  a  partnership  resulting  from  the  carry- 
ing on  of  business  in  the  name  of  a  defectively  organized  corpo- 
ration there  must  be  some  evidence  of  participation  in  or  author- 
ization of  the  business  carried  on  in  such  name  or  of  holding  one's 
self  out  as  a  principal  in  relation  thereto.67  A  promoter  does  not, 


versing,  12  J.  &  S.  260;  Raisbeck  v. 
Oesterricher,  4  Abb.  N.  C.  444. 

South  Dakota. — Singer  Mfg.  Co.  v. 
Peck,  9  S.  D.  29,  67  N.  W.  947. 

Texas. — American  Salt  Co.  v. 
Heidenheimer,  80  Tex.  344,  15  S.  W. 
1038,  26  Am.  St.  Rep.  743. 

Virginia. — Coalter  v.  Bargamin,  99 
Va.  65,  37  S.  E.  779. 

Wisconsin. — Bergeron  v.  Hobbs,  96 
Wis.  641,  71  N.  W.  1056,  65  Am.  St. 
Rep.  85. 

See  cases  cited  in  note  to  Ruther- 
ford v.  Hill,  17  L.  R.  A.  549. 

As  to  foreign  corporations,  see 
note  to  Cone  Export  &  Commission 
Co.  v.  Poole,  24  L.  R.  A.  289,  293, 
and  note  to  Empire  Mills  v.  Alston 
Grocery  Co.,  12  L.  R.  A.  366. 

The  fact  that  the  corporation  en- 
gages in  ultra  vires  business  does 
not  affect  the  validity  of  its  organi- 


zation. Tennessee  Automatic  Light. 
Co.  v.  Massey,  (Tenn.)  56  S.  W.  35; 
Seeberger  v.  McCormick,  178  111. 
404,  53  N.  E.  340,  writ  of  error  dis- 
missed, 175  U.  S.  274,  44  L.  Ed.  161, 
20  Sup.  Ct.  128. 

67.  Federal. — Harrill  v.  Davis, 
168  Fed.  Rep.  187,  192,  94  C.  C.  A. 
47,  22  L.  R.  A.  N.  S.  1153 ;  cf.  Wech- 
selberg  v.  Flour  City  Natl.  Bank, 
64  Fed.  Rep.  90,  97,  12  C.  C.  A.  56, 
24  U.  S.  App.  308,  26  L.  R.  A.  470. 

Alabama. — Magnolia  Shingle  Co. 
v.  J.  Zimmern's  Co.,  3  Ala.  App. 
578,  584,  58  So.  90. 

Connecticut. — See  U.  S.  Wood 
Preserving  Co.  v.  Lawrence,  89> 
Conn.  633,  95  Atl.  8. 

Massachusetts — See  Ward  v. 
Brigham,  127  Mass.  24;  Fay  v. 
Noble,  7  Gush.  188. 

Minnesota. — Roberts   Mfg.   Co.    v. 


ABORTIVE  PROMOTIONS. 


587 


by  joining  in  the  promotion  of  a  proposed  company,  authorize  his 
associates,  in  case  the  organization  of  the  company  is  abandoned, 
to  carry  on  the  proposed  business  on  his  behalf. 

The  court  in  Rutherford  v.  Hill  68  said,  "  The  sole  question, 
therefore,  seems  to  be  whether  or  not,  where  three  or  more  per- 
sons sign,  acknowledge,  and  file  articles  of  incorporation  under  the 
laws  of  this  state,  and  do  nothing  further  towards  effecting  an 
organization  or  carrying  on  the  proposed  business,  and  one  of 
them  assumes  to  do  business  under  the  proposed  corporate  name 
and  incurs  liabilities,  the  other  persons  who  signed  said  articles 
are  liable.  *  *  *  It  is  not  doubted  that  cases  might  arise  and 
can  readily  be  imagined  where  the  incorporators  sought  to  be 
charged  might  take  such  part  in  conducting  the  business,  or  hold 
themselves  out  to  the  world  as  partners  or  as  principals  in  the 
business,  that  they  would  be  held  liable ;  but  this  would  grow  out  of 
their  conduct  in  carrying  on  the  business,  and  not  out  of  the  mere 


Schlick,  62  Minn.  332,  64  N.  W.  826; 
Johnson  v.  Corser,  34  Minn.  355,  25 
N.  W.  799;  Upton  v.  same,  34  Minn. 
355,  25  N.  W.  801. 

In  the  Corser  cases  the  corpora- 
tion involved  was  not  intended  to 
be  formed  for  profit. 

Missouri. — Railroad  Gazette  v. 
Wherry,  58  Mo.  App.  423;  Farmers 
State  Bank  v.  Kuchs,  163  Mo.  App. 
606,  612,  147  S.  W.  862. 

Nebraska. — Abbott  v.  Omaha 
Smelting  Co.,  4  Neb.  416. 

New  York.— West  Point  Foundry 
Ass'n  v.  Brown,  3  Edw.  Ch.  284. 

Ofcio.— Medill  v.  Collier,  16  Ohio 
St.  599,  47  Am.  Dec.  387. 

.Oregon. — Rutherford  v.  Hill,  22 
Or.  218,  29  Pac.  546,  17  L.  R.  A. 
549,  29  Am.  St.  Rep.  596. 

Utah.— Mitchell     v.     Jensen,     29 


Utah  346,  359,  81  Pac.  165,  and 
cases  cited. 

And  see  Thompson  on  Corpora- 
tions, (2nd  Ed.),  §  4745.  Cf.  Bed- 
well  v.  Ashton,  87  111.  App.  272. 
See  also  Clark  &  Marshall  on 
Private  Corporations,  §  78. 

It  is  said  in  Roberts  Mfg.  Co.  v. 
Schlick,  62  Minn.  332,  64  N.  W.  828, 
that  where  the  defendant  sued  was 
one  of  several  promoters,  and  all 
acted  as  a  body  by  a  board  of  di- 
rectors, and  he  was  a  member  of 
such  board,  only  slight  additional 
evidence  is  required  to  establish 
prima  facie  his  authorization  or 
ratification  of  contracts  made  in  the 
name  of  the  association,  whether 
they  were  made  before  or  after  he 
became  a  director. 

68.  22  Or.  218,  29  Pac.  546,  17  L. 
R.  A.  549,  29  Am.  St  Rep.  596. 


588  THE  LAW  OF  PROMOTERS. 

fact  of  signing  and  filing  the  articles.  If  the  appellants  could  be 
held  liable  in  this  case,  such  liability  would  rest  on  the  mere  act  of 
signing  and  filing  the  articles,  and  not  upon  any  participation  in 
the  business,  either  directly  or  indirectly.  It  would  have  to  rest 
upon  the  theory,  that  by  the  mere  signing  the  articles  with  Martin, 
they  constituted  him  their  general  agent  to  proceed  to  conduct  the 
business  contemplated  by  the  proposed  corporation,  thus  creat- 
ing a  liability  for  any  act  of  his  done  within  the  scope  of  the 
powers  of  the  proposed  corporation.  No  authority  to*  which  our 
attention  has  been  directed,  has  gone  so  far,  and  we  feel  safe  in 
saying  that  none  can  be  found  to  support  that  doctrine." 

The  liability  of  persons  carrying  on  business  in  the  name  of  a 
defectively  organized  corporation  is  not  really  a  promoter's  lia- 
bility. It  has  been  briefly  mentioned  because  it  is  a  liability 
to  which  promoters  may,  and  frequently  do  subject  them- 
selves, but  the  liability  is  cast  upon  them,  not  because  they  are 
the  promoters  of  a  defectively  organized  corporation,  but  be- 
cause they  carry  on  business  in  its  name.  Their  liability,  if  any, 
exists  not  because  of  their  having  been  the  promoters  of  an  abor- 
tive corporation,  but  because  of  their  being  members  of  an  unin- 
corporated company.  The  question  is  more  properly  one  for 
discussion  in  a  work  on  corporation  law.69 

69.  See  Thompson  on  Corpora-  Beach  on  Private  Corporations,  § 
tions,  (2nd  ed.),  §  4737,  et  seq.;  128,  et  seq.,  §  598;  Clark  &  Mar- 
Cook  on  Corporations,  (7th  ed.),  shall  on  Private  Corporations,  §  78; 
§  231,  et  seq.;  Morawetz  on  Cor-  Taylor  on  Corporations,  (5th  ed.), 
porations,  (2nd  ed.),  §  748;  Purdy's  §  148,  §  739,  et  seq. 


INDEX 


INDEX 


[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 


A. 

ABORTIVE  PROMOTIONS: 

Expenses  of,  by  whom  borne,  560-9. 
Liability  of  promoters, 

For  compensation  of  co-promoters,  563. 
For  expenses  in  general,  560. 

To    creditors    who    agreed    to    look    to    moneys    paid    by    sub- 
scribers, 562-3. 

Returning  moneys  to  subscribers,  563. 

Where  payment  conditioned  upon  organization  of  company,  563 
What  promoters  liable  for  expenses,  560-2. 
For  repayment  of  subscribers'  deposits,  567. 
What  promoters  liable  for,  572-3. 
Liability  of  depositary,  573. 
Deduction  of  expenses,  567-9. 
What  expenses  deducted.  577. 
Contribution  between  promoters,  564. 
Suits  for  recovery  of  deposits,  574-6. 

Actions  for  money  had  and  received,  574. 
Accounting,  574-6. 
Joinder  of  other  subscribers,  575-6. 
Effect  of  voluntary  account,  576. 
Remedies  of  purchasers  of  shares,  574. 
Subscribers  not  ordinarily  liable  for  expenses,  565,  567-8. 
When  liable,  565,  568-9. 

Effect  of  statement  of  accounts,  566-7,  576,  564n.  12. 
Liability  on  subscription  notes,  569. 
Proof  of  abandonment  of  promotion,  670. 

Variance  between  corporation  as  organized  and  as  Intended,  570-1. 
Disposition  of  property  acquired,  579. 

591 


592  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to  notes.] 

ACCOUNTING : 

(By  promoters  to  corporation,  see  Remedies  of  corporation;  By  pro- 
moters to  subscribers,  see  Remedies  of  individual  stockholders ;  By 
promoters  of  abortive  corporations,  see  Abortive  promotions.) 
For  shares  received  on  behalf  of  associates  in  promotion,  62-3. 
Between  promoters,  144,  527,  564. 

ACTION  FOR  DAMAGES: 

(See  Damages,  Action  for.) 

ACTIONS : 

(See  also  Remedies  of  corporation,  Remedies  of  individual  stock- 
holders, Action  for  damages,  Specific  performance,  Accounting,  Con- 
tracts of  promoters,  Recovery  of  expenses,  Property  purchased  by 
promoters,  Parties  to  actions.) 

Action  by  corporation  because  of  fraud  on  promoters,  433,  506, 
437n.  3. 

Because  of  fraud  of  promoter  on  co-promoters,  533. 
Action  against  promoters  transitory,  358. 
Assignable,  336,  459n.  11. 
Survives  death  of  promoter,  351. 
To  compel  corporation  to  issue  shares,  63. 
To  recover  property  conveyed  to  promoter,  68. 

'  For  breach  by  third  party  of  contract  with  promoters,  147,  130n.  14, 
511n.  10. 

ADMISSIONS : 

Of  promoter  as  evidence  against  corporation,  129. 

Of  promoter  as  evidence  against  co-promoters,  538n.  16. 

AFFIRMANCE : 

(See  Rescission,  Defenses.) 

AGENTS : 

(See  also  Brokers,  Employees  of  promoters.) 
Promoters  not  agents  of  corporation,  22,  76-7. 
Liability  of  promoter  for  representations  of  agent,  367. 
Liability  of  agent,  349-50,  349n.  52,  368n.  19. 

AGREEMENTS  FOR  PROMOTION  OF  CORPORATION: 

(Interpretation    of,    see    Interpretation;    Actions    for    breach    of,    see 


INDEX.  593 

[References  are  to  pages,  except   that  numbers 
following   an   "n"   refer   to  notes.] 

AGREEMENTS  FOR  PROMOTION  OF  CORPORATION— (Continued)  : 
Specific  performance,  Accounting,  Action  for  damages,  Property  pur- 
chased by  promoters,  Recovery  of  expenses,  Measure  of  damages, 
Mechanics'  liens;  Contracts  made  on  behalf  of  corporation  by  pro- 
moters, see  Contracts;  Rights  and  liabilities  of  promoters  inter  se, 
see  Liability  of  promoters.) 

Not  necessarily  terminated  by  death  of  promoter,  31n.  1. 
Definiteness  of  agreement,  61-2,  64-6. 
Agreement  to  make  definite  agreement,  64n.  25. 
Agreement  to  assist  in  forming  corporation,  64n.  25. 
Agreements  involving  purchase  of  specific  property, 
Validity  of,  31. 

When  fraud  involved,  32-4. 

Of  oral  agreement  involving  conveyance  of  real  estate,  34. 
Interpretation  of,  42-4. 
Performance  of,  45. 
Involving  contracts  of  employment, 
Validity  of,  34. 

Where  control  of  directors  impaired,  36-8. 
Where  no  time  specified,  35n.  10. 
Involving  election  of  officers,  38. 
For  division  of  capital  stock,  39-41. 

Enforcement  by  corporation,  3J>-40n.  19. 
Interpretation  of  such  agreements,  49-55. 
Where  fraud  on  public  intended,  528n.  2. 
Promoter  refusing  share  of  unissued  stock,  49n.  43. 
Fixing  promoter's  compensation,  47-9,  162. 
Restricting  sale  of  promoter's  shares,  40. 

Interpretation  of  such  agreements,  55. 

Limiting  number  of  shares  to  be  held  by  single  stockholder,  40. 
For  control  of  corporation,  40. 

Interfering  with  increase  of  capital  stock,  41. 
Interfering  with  increase  or  decrease  of  directors,  41n.  25. 
Involving  Issue  of  shares  in  violation  of  statute.  33-4,  36-7. 
For  subscription  to  shares  of  proposed  company,  85-8. 
To  use  shares  for  benefit  of  corporation,  47. 

To  issue  full  paid  shares;  liability  of  promoters  because  of  invalid 
assessment,  45. 

AMENDMENT : 

Of  proceedings  brought  in  name  of  receiver,  337n.  9. 


594  INDEX. 


[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

ARTICLES  OF  ASSOCIATION: 
(See  also  Charter.) 
Fixing  promoters  compensation,  163n. 

Where  promoter's  identity  concealed,  163n. 

Where  part  of  compensation  secretly  paid  to  directors,  163n. 
Granting  directors  power  to  fix  promoter's  compensation,  163n. 
Provisions  making  corporation  liable  on  promoter's  contracts,  79-80. 
Alteration  in,  384n.  55. 

ASSIGNEES  OF  CORPORATION : 
Suits  by,  336. 
Rescission  by,  336n.  7. 

ATTORNEYS : 

Of  prospective  corporation,  not  promoters,  11. 
Observations  on  duties  of,  lln.  33. 
Compensation  of,  165-9. 

On  abortive  promotion,  577-8. 
Fees  in  minority  stockholder's  suit,  337n.  10. 
Non-disclosure  of  facts  on  advice  of,  389. 
Promoter  dealing  through  dummy  on  advice  of,  401n.  84. 
False  statements  based  on  opinion  of,  374n.  36,  379n.  47. 

B. 

BANK  STATEMENTS : 

False  representations  in,  365n.  8. 

BANKERS : 

Are  not  promoters,  11. 

Liability  for  return  of  deposits,  573. 

BANKING  CORPORATIONS: 

Compensation  of  promoters  selling  shares  of,  161n.  27. 

BANKRUPTCY : 

Of  promoter  as  discharge,  298. 

BILL  OF  PARTICULARS: 

Of  services  rendered  by  promoter,  162n.  35. 

Of  grounds  of  belief  in  truth  of  representations,  375n.  39. 


INDEX.  595 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

BONA  FIDE  HOLDERS: 

Of  shares  unlawfully  taken  by  promoters,  310-12,  63n.  20. 

Of    obligations    of    corporation     unlawfully    taken    by    promoters, 

315-8,  329. 

Of  instruments  not  negotiable  in  terms,  316n.  41  and  42. 
Of  subscription  notes,  569,  451n.  41. 
Burden  of  proof,  317. 
Suit  to  determine  who  are,  317-8. 
Cancelling  promoters'  shares  to  increase  dividend  of,  341. 

BONDHOLDERS : 

Fiduciary  relation  of  promoter  to,  19. 
Suits  by,  in  behalf  of  corporation,  348. 

BONDS : 

(See  also  Creditors.) 

Purchase  of,  induced  by  fraud,  348. 

Right  of  purchasers  of,  to  assume  property  worth  par  value  of  shares 

issued  therefor,  432n.  95. 
Liability     of     promoters     receiving    bonds     issued     in     violation    of 

statute,   187n.  44. 
Bonds  unlawfully  taken  by  promoters, 

Assent  of  all  stockholders  not  conclusive  upon  creditors,  210n.  29. 
Remedies  and  defenses  of  corporation,  315-8,  329. 
Measure  of  damages,  490. 

Prospectus    inviting    subscription    for;    complaint    by    purchasers   of 
shares,  364. 

BROKERS : 

(See  also  Agents,  Employees  of  promoters.) 
Selling  shares,  compensation  of,  160-1. 
Liability  of  promoter  for  false  representations  to,  367. 

BUBBLE  COMPANIES :  502,  567n.  21. 

BURDEN  OF  PROOF : 

Of  commencement  of  relation  of  promoter,  26. 
Of  abandonment  of  promotion,  570. 
Of  liability  on  contracts  of  promoter,  143,  562n.  4. 
Of  knowledge,  llln.  74,  285n.  27. 


596  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

BURDEN  OF  PROOF— (Continued)  : 

Of  legality  of  promoter's  profit,  201. 

Of  disclosure  of  promoter's  profit,  201,  209n.  27. 

Of  disclosure  of  promoter's  compensation,  514n.  21. 

Of  acquiescence,  284n.  26,  285n.  27. 

Of  affirmance  of  voidable  subscription,  466n.  37. 

In  action  by  promoter  to  recover  commission  from  vendor,  514n.  21. 

and  22. 
In  action  by  corporation  to  recover  commission  agreed  to  be  paid 

to  promoter,  516n.  24. 
Of  laches,  293,  472. 

That  party  is  innocent  holder  for  value,  317. 
Of  damages,  190n.  53,  499n.  49. 
In  action  for  fraud  and  deceit. 

Of    defendant's    knowledge    of    falsity    of    representations, 

377n.  44. 

As  to  sense  in  which  subscriber  read  prospectus,  423n.  66. 
As  to  sense  in  which  promoter  meant  prospectus,  425. 

Of  defendant's  belief  in  truth  of  representation  of  knowledge, 
378-9. 

BY-LAWS : 

Action  involving  interpretation  of;  in  what  jurisdiction  maintained, 
359n.  87. 

c. 

CANCELLATION : 

(See   also   Remedies   of   corporation,    Remedies   of  individual   stock- 
holders. ) 
Of  shares  unlawfully  taken  by  promoters,  310-11,  314-5,  329. 

Recovery  of  dividends  paid  on,  311n.  24. 

Possible  injury  to  creditors  considered,  310-11. 

Shares  pledged  as  security  for  loan,  312. 

After  receivership,  341. 

Of  obligations  unlawfully  taken  by  promoters,  315-8,  329. 
Of  judgment  unlawfully  taken  against  corporation,  317,  356-7. 
Of  secret  royalty  agreement,  332-3. 

CEMETERY   CORPORATIONS: 

Rights  of  purchases  of  lots  against  promoters,  247n. 


INDEX.  597 

[References  are  to  pages,  except  that  numbers 
following  an   "  n "   refer  to  notes.] 

CERTIFICATES : 

(See.  also  Stock  certificates.) 

Promoters'  certificates,  41. 

Required  by  law,  false  representations  in,  365,  331n.  87. 

Under  New  York  statute,  376n.  43. 
Required  by  stock  exchanges,  false  representations  in,  366,  503. 

CHARTER : 

(See  also  Articles  of  association.) 

Provisions  making  corporation  liable  on  promoters'  contracts,  79-80. 
Provisions  for  compensation  of  persons  employed  by  promoters,  166. 
Provisions  authorizing  promoters  to  contract  for  corporation,  77-8. 
Actions  involving  interpretation  of,  where  brought,  359n.  87. 
Property  rights  in  charter  obtained  by  promoters,  532. 

CHECKS : 

Given  to  promoters,  enforcement  by  corporation,  134. 
Given  by  provisional  committee,  561n. 

"CLEAN  HANDS,"  MAXIM  OF,  279-81,  289. 

CLOUD  ON  TITLE : 

Deed  to  corporation  never  formed,  137. 

COMMENCEMENT  OF  RELATION  OF  "  PROMOTER  " : 
No  decisive  test,  22. 
Depends  on  particular  facts,  26. 
Before  existence  of  corporation,  22-3. 
First  overt  act  in  organization  of  corporation,  25-8. 
Preparation  and  filing  of  certificate  of  incorporation,  26. 
Solicitation  of  subscriptions,  26-7. 

Purchase  of  property  with  view  to  re-sale  to  corporation,  23-5,  27-8. 
Purchase  of  property  on  behalf  of  corporation,  24-6. 
Burden  of  proof,  26. 

COMMISSIONS  OF  PROMOTERS: 

(See  Secret  profits,  Vendors  to  the  corporation.) 

COMPENSATION  OF  PROMOTERS: 

Right  to,  dependent  on  scope  of  enterprise,  158,  267. 
View  that  promoters  not  entitled  to,  154. 


598  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to   notes.] 

COMPENSATION  OF  PROMOTERS—  (Continued)  : 
Claim  founded  on  act  of  incorporation,  156n.  14. 
Claim  founded  on  subsequent  promise,  155n. 
Services  rendered  pursuant  to  request  of  incorporators,  155n. 
Corporate  note  given  in  payment  for  services,  155n. 
Shares  issued  in  payment  for,  164,  163n. 
Recovery  of  payments  made  by  corporation,  155n.  163n. 
View  that  promoter  entitled  to  reasonable  compensation,  '154-7. 

Services  must  be  reasonable  and  necessary,  157n.  17. 

And  rendered  with  expectation  of  payment,  157-8,  164. 

Where  promoter  stated  no  allowance  would  be  made,  157-8. 

Professional  services,  166-7,  578. 

Services  in  obtaining  subscriptions,  160-1. 
Under  English  statute,  161n.  27. 
In  procuring  agents  to  solicit  subscriptions,  161. 

Services  rendered  after  promoter  became  director,  159. 

Effect  of  fraud  on  promoter's  right  to,  159,  309. 

Effect  of  breach  of  agreement  with  co-promoter,  168n.  55. 

Not  affected  by  provisions  relating  to  compensation  of  "  officers," 

158n.  18. 

As  between  promoters,  166-7,  551,  563,  578. 
Amount  of  compensation, 

To  be  fixed  by  corporation,  161. 

Corporation  not  bound  by  prior  agreement,  157,  162. 
Power  of  co-promoter  to  modify,  537n.  14. 

Power  of  directors  to  fix,  162. 

Where  power  granted  by  articles  of  incorporation,  163n. 

Where  directors  not  independent,  162-4. 

When  concealment  practised,  163n. 

Directors'  liability  for  negligence  in  paying,  164. 

Resolution  of  stockholders  fixing,  164. 

Right  of  promoters  to  vote  proxies  on,  164n.  38. 
Shares  issued  in  payment  for  services,  164,  163n. 
Agreements  of  third  parties  to  pay,  47-9,  328,  514-7. 

(See  also  Consolidations,  Reorganizations.)  „ 

Compensation  upon  reorganization,  552-6. 
Upon  abortive  promotion,  563,  578. 
As  item  of  value  of  plant  in  rate  cases,  152n.  2. 


INDEX.  599 

[References  are  to  pages,  except  that  numbers 
following  an   "  n "   refer  to  notes.  ] 

CONCEALMENT : 

(Fraud  by  concealment,  see  False  representations;   Concealment  of 
promoters'  profits,  see  Secret  profits.) 

CONFLICT  OF  LAWS:  359. 

CONSOLIDATIONS : 
In  general,  552. 

Misrepresentations  in  regard  to  constituent  companies,  331,  427,  437n.  3. 
Promoter's   liability  for  dividends  upon   shares   of  constituent  com- 
pany, 557. 
Added  value  from  combination  not  "  property  "  for  which  shares  may 

be  issued,  191n.  54. 
Promoter's  compensation, 

Under  employment  by  constituent  company,  552-3. 
Where  consolidation  is  ultra  vires,  553n.  2. 
Compensation  must  be  disclosed,  554. 

Promoter  acting  under  express  agreement  must  prove  perform- 
ance, 168,  554. 
Services  of  director  presumed  gratuitous,  553. 

CONSTRUCTIVE  NOTICE: 
(See  also  Notice.) 

Doctrine  of,  in  general  inapplicable,  214. 
Of  contents  of  charter  and  by-laws,  217-8,  461,  465. 

Of  corporate  records,  217. 

Of  stock  certificates,  465-6. 

Of  recorded  deeds,  218. 

Of  prospectus  and  circulars  received,  471n.  58. 

Of  documents  mentioned  in  prospectus,  218,  461. 
Facts  disclosed  at  stockholders'  meeting,  217n.  46. 

Where  stockholder  represented  by  proxy,  218n.  46. 

Where  proxy  held  by  guilty  promoter,  471. 
Putting  stockholders  on  inquiry,  471,  llln.  74. 
Where  party  lives  at  a  distance,  461n.  18. 
Of  facts  contradicted  by  representations,  218,  461. 
To  third  parties,  of  fraud  committed  by  promoters,  311n.  23. 
After  subscriber  puts  himself  at  arm's  length,  465n.  34. 


600  INDEX. 

[References  are  to   pages,  except  that  numbers 
following   an   "  n "   refer   to   notes.] 

CONTRACTS  OF  PROMOTERS: 

(See  also  Agreements  for  promotion  of  corporation.) 
Power  of  promoters  to  contract  for  corporation, 

Before  corporation  has  achieved  existence,  74-7,  102-6. 
Pending  complete  organization,  77-8. 
After  complete  organization,  78. 
Under  provisions  of  statute,  77-8,  76n.  1. 
Under  charter  provisions,  77-8.  « 

Liability  of  corporation, 

Imposed  by  statute,  79,  76n.  1. 
By  articles  of  association,  79-80. 

Assumption  of  liability  by  fully  organized  company,  80,  88. 
Not  a  ratification,  80-3,  97. 
Effect  of  resolution  to  "confirm,"  83. 
Power  of  officers  to  bind  corporation,  89-90. 

Limits  on  power  of  president,  90n.  29. 

Power  of  mere  agent,  90n.  29. 

Good  faith  required,  90. 

Officer  must  be  free  from  interest,  90-2. 

Where  all  stockholders  are  parties  to  agreement,  90-1. 

Officer  who,  as  promoter  made  original  contract,  91-2,  147. 

Officer  who  is  opposite  party  to  contract,  92. 
Act  of  assumption,  92-6. 

Assumption  by  corporation  a  question  of  fact,  92. 
Resolution  of  directors  not  communicated  to  other  party,  95-6. 
Necessity  of  consideration,  96. 
Corporate  liability  because  of  acceptance  of  benefits,  96-117. 

Enforcement  at  law  or  equity,  100. 

Benefits  received  before  complete  organization,  105-6,  154-6, 
169. 

Lord  Cottenham's  rule,  102. 

Promises  in  consideration  of  withdrawing  opposition  to  char- 
ter, 102-6. 

Corporate  obligation  to  pay  for  services  in  procuring  contracts 
accepted  by  it,  107. 

Contracts  made  by  incorporators,  109. 

Benefits  must  be  accepted  with  knowledge,  110. 

Burden  of  proof  of  knowledge,  llln.  74. 

Putting  corporation  on  inquiry,  llln.  74. 


INDEX.  601 


[References  are  to  pages,  except  that  numbers 
following  an   "  n "   refer  to  notes.] 

CONTRACTS  OF  PROMOTERS— (Continued)  : 

Corporation   not   bound   unless   agreement   contemplates   per- 
formance by  it,  112-16,  39n.  19,  124n.  97. 
Unless  obligation  expressly  assumed,  116. 
Contract  amended  to  require  corporate  performance,  114-5. 
Contract    contemplating    performance    by    different    cor- 
poration, 113. 

Contracts  of  continuing  nature,  114. 
Contracts  drawn  to  cast  liability  on  assignee,  117. 
Corporation  organized  to   avoid   obligations  of  assignor, 

117. 
Particular  contracts, 

Contracts  of  employment,  34-8,  121. 
Naming  officers  and   fixing  salaries,  38,   121. 
For  division  and  control  of  shares,  39-40. 
As  to  price  to  be  paid  for  promoter's  property,  39n.  19. 
As  to  increase  or  decrease  of  directors,  41n.  25. 
Taking  over  going  concern  as  of  earlier  date,  121. 
Subscription  agreements,  122. 
That  corporation  could  not  make,  118-20. 
Ultra  vires  agreements,  118-20. 
Contrary  to  public  policy,  118-20. 
Relative  to  location  of  route  or  plant,  121n.  89. 
Improper  conditions  annexed  to  lawful  contract,  99. 
Actual,  different  from  written,  121-2. 
Not  to  be  performed  within  one  year,  82-3. 
Status  pending  action  of  corporation,  83. 
Theory  of  continuing  offer,  83-4. 
Theory  of  alternative  offer,  85. 
Of  subscription  agreements,  85-8. 
Personal  liability  of  promoters,  84,  91,  139-47. 
Enforcement  of  promoters'  contracts. 
By  corporation,  130-5,  147-9. 

(See  also  Conveyances,  Public  grants,  Options,  Franchises,  Sur- 
veys. ) 

Defense  that  improper  conditions  imposed  by  promoters,  99. 
That  promoters  failed  to  perform  personal  promises,  99-100. 
Corporation    must    be    organized    within    reasonable    time, 
130n.  14. 
And  in  contemplated  state,  130n.  14. 


602  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to  notes.] 

CONTRACTS  OF  PROMOTERS— (Continued)  : 

Breach  before  organization  of  corporation,  148,  130n.  14. 
Enforcement  of  subscription  agreements,  130n.  14. 
By  promoters,  133-4,  147-9. 

After  contract  accepted  by  corporation,  131-2. 

On  refusal  of  other  party  to  deal  with  corporation,  133-4,  148. 

On  failure  to  organize  corporation,  149. 

« 

CONTRIBUTION  BETWEEN  PROMOTERS: 
For  expenses  of  abortive  promotion,  564. 
For  contract  liabilities,  144. 
For  damages  paid,  550. 

Under  English  Companies  Act,  550. 
For  secret  profits  repaid,  550. 

CONVEYANCES : 

(See  also  Franchises,  Public  grants,  Surveys.) 
To  corporation  not  yet  formed,  effect  of,  136-8. 

After  granting  of  charter,  138. 
Necessity  of  deed  to  property  which  corporation  organized  to  acquire, 

139. 
Compelling  conveyance  by  promoter  to  corporation,  135-6. 

CORPORATE   NAME: 

Incorporation  of  partnership  without  change  of  name,  582n. 

CORPORATE  RECORDS: 

Constructive  notice  of,  217,  461,  465. 

CORPORATION : 

(See  also   Liability   of  corporation;   Responsibility   for  acts  of  pro- 
moters, see  Contracts  of  promoters,  Notice,  Actions.) 
Fiduciary  relation  of  promoter  to,  16-19. 

Action  by,  for  false  representations  of  promoters,  433,  437n.  3. 
Corporation  acting  as  promoter,  13. 

COST  OF  PROPERTY : 

(See  Lawful  profits,  Selling  property  to  corporation.) 

COTTENHAM'S   (LORD)  RULE:  102. 


INDEX.  603 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

COUNSEL:  (See  Attorneys.) 

CREDITORS  OF  CORPORATION : 

Fiduciary  relation  of  promoter  to,  19. 

Action  by,  for  fraud  and  deceit,  348,  370n.  21. 

For  mismanagement  prior  to  giving  credit,  348n.  50. 
Suits  by,  to  enforce  rights  of  corporation,  348. 
Injury  to,  as  preventing  cancellation  of  promoter's  shares,  310-1. 

CRIMINAL  LIABILITY  OF  PROMOTERS : 

Accepting  gratuities  from  persons  selling  property  to  corporation,  501. 

From  persons  contracting  with  corporation,  501. 
"  Bubble  companies,"  502. 
Fraud  in  sale  of  shares,  502-4. 

False  statements,  502. 

Creating  false  impression,  502-3. 

Fictitious  dividends,  503. 

Creating  fictitious  market  for  shares,  503. 

Procuring  listing  by  false  reports,  503. 

Under  New  York  Statute,  503. 

Under  English  Companies  Act,  504. 

Fraudulent  use  of  mails,  504. 

D. 

DAMAGES,  Action  for: 

(See  also   Remedies  of  corporation,   Remedies  of   individual   stock- 

holders. ) 

For  breach  of  agreement  to  promote  corporation,  04,  70-1. 
Agreement  must  be  definite,  64-6. 

Effect  of  uncertainty  as  to  value  of  shares  to  be  received,  67-8,  70. 
For  unlawful  sale  of  promoter's  property  to  corporation,  301-5,  323-6. 
For  fraud  and  deceit  in  sale  to  corporation,  330-1. 
For  fraud  and  deceit  in  sale  of  shares,  436. 

DEFECTIVE  ORGANIZATION  OF  CORPORATION: 

Partnership  liability  of  promoters,  581-8. 
Rescission  of  subscriptions,  416,  87n. 


604  INDEX. 

[References  are  to  pages,  except  that  numbers 
following  an  "  n "   refer  to  notes.] 

DEFENSES : 

To  complaint  by  corporation. 

That  property  sold  to  corporation  was  worth  selling  price,  185,  190,  314. 

That  promoter  believed  profits  did  not  exceed  reasonable  compensa- 
tion, 185. 

That  corporation  was  not  injured,  185-6. 

That  corporation  was  actually  benefited,  186. 

That  promoter  acted  in  good  faith,  185,  190. 

That  shares  issued  to  promoter  were  full-paid,  187. 

That  cause  of  action  did  not  survive  promoter,  351. 

That  disclosure  of  profits  waived,  218,  271,  373. 

That  promoter  gained  nothing  by  transaction,  272,  330,  455. 

That  shares  taken  by  promoter  had  no  value,  272,  314—5,  455. 

That  promoter  guaranteed  obligations  of  corporation,  273. 
Invested  profits  in  notes  of  corporation,  274. 
Returned  profits  to  co-promoter,  274. 
Surrendered  securities  to  corporation,  274. 

That  corporation  compromised  with  vendor  who  paid  commission  to 
promoter,  275. 

That  judgment  would  compel  promoter  to  pay  more  than  share  of 
damages,  276. 

That  other  guilty  promoters  would  be  benefited  by  recovery,  277. 

That  no  innocent  stockholders  still  interested,  278-9. 

That  defrauded  syndicate  in  turn  defrauded  corporation,  279. 

That  corporation  itself  defrauded  subscribers,  279. 

That  moneys  taken  by  promoter  were  unlawfully  acquired  by  corpora- 
tion, 280. 

That  corporation  might  readily  have  ascertained  the  facts,  218,  459. 

That  defendants  acted  on  advice  of  counsel,  389,  374n.  36,  379n.  47, 
401n.  84. 

That  subscribers  had  no  knowledge  of  promoter's  subscription,  285. 

That  no  original  stockholders  remain,  335,  343. 

Of  reorganization  of  corporation,  286. 

That  corporation  has  assigned  claim,  287,  336n.  7. 

Of  statute  of  limitations,  290,  462. 

Laches  (See  Laches,  Delay),  291-7. 

Delay  as  defense  to  rescission,  297,  472. 

Of  judgment  for  or  against  co-promoter,  288. 

Of  bankruptcy  of  promoter,  298. 


INDEX.  605 

[References  are  to  pages,  except  that  numbers 
following  an   "n"   refer  to  notes.] 

DEFENSES— (Continued)  : 

Defenses  to  minority  stockholders'  suits. 

That  plaintiff  acquired  shares  in  violation  of  statute,  282. 

After  fraud  complained  of,  341-3. 

With  knowledge  of  fraud,  344-5. 

That  plaintiff  or  transferor  acquiesced  in  fraud,  283,  343-4. 
That  plaintiff  purchased  shares  for  purpose  of  bringing  suit,  344-5. 

Maintains  suit  for  ulterior  purpose,  289. 

Committed  other  fraud  on  corporation,  345. 
Defense  of  settlement  with  majority  stockholders,  289,  493. 
Defense  of  settlement  with  other  promoters,  494. 
Laches,  291-7. 
To  actions  for  false  representations. 

That  defendant  believed  representations  to  be  true,  373-80,  456. 

That  no  benefit  accrued  to  defendant,  330,  455. 

That  defendant  urged  directors  to  return  subscription   moneys, 
455-6. 

That  enterprise  was  doomed  to  failure  in  any  event,  456. 

That  representations  subsequently  became  true,  418-9,  384n.  61. 

That  later  circular  corrected  misrepresentations,  372. 

Statement  based  on  opinion  of  counsel,  374n.  36,  379n.  47. 

Disclosure  omitted  on  advice  of  counsel,  389,  401n.  84. 

That  property  misrepresented  not  sold  to  corporation  at  time  of 
subscription,  457. 

That  unlawful  plan  of  selling  property  to  corporation  not  carried 
out,  458. 

That  suit  on  same  misrepresentation  might  be  maintained  by  cor- 
poration, 434-5. 

Prior  recovery  by  corporation,  457. 

That  plaintiff  had  before  suit  parted  with  shares,  458. 

That  plaintiff  resold  shares  at  a  profit,  459. 

That  plaintiff  had  notice  that  promoter's  information  not  reliable, 
383n. 

That  plaintiff  did  not  rely  upon  representations,  369-73,  462. 

That  plaintiff  agreed  not  to  rely  upon  representations.  373. 

That  plaintiff  might  have  ascertained  falsity  of  representations, 
459,  462. 

That  subject  matter  of  representations  was  at  hand  for  Inspec- 
tion, 462. 

That  plaintiff  made  independent  investigation,  372-3,  462. 


606  ,  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to   notes.] 

DEFENSES— (Continued)  : 

That  representations  as  to  credit  must  be  in  writing,  462. 

Of  Statute  of  limitations,  462. 

That  oral  representations  merged  in  subscription  agreement,  122, 
478. 

That  plaintiff  had  elected  to  follow  inconsistent  remedy,  459. 

That  cause  of  action  does  not  survive  death  of  promoter,  351. 

Affirmance  of  transaction,  469. 
To  action  for  rescission  of  subscription, 

That  promoter  believed  representations  to  be  true,  373-80. 

That  plaintiff  might  readily  have  ascertained  falsity,  459. 

That  representations  subsequently  became  true,  384,  418. 

That  no  complaint  made  by  other  subscribers,  411n.  22. 

That  later  subscriptions  made  on  faith  of  plaintiff's,  411. 

That  plaintiff's  subscription  made  in  violation  of  statute,  464n.  28. 

That  plaintiff  has  remedy  at  law,  442n.  15. 

Affirmance  of  subscription,  464-9,  572n.  37. 

Laches,  469-78. 

Delay  in  disaffirmance,  472,  571n.  37. 
To  action  of  subscribers  demanding  accounting  for  profits, 

That  promoter  returned  profits  to  corporation,  463. 

That  profits  constituted  fraud  on  other  subscribers,  463. 

That  shares  issued  in  violation  of  statute,  464. 

DEFINITIONS :  4-6,  15. 

Explanation  of  term  promoter,  1,  6-15. 

DELAY : 

(See  Statute  of  limitations,  Laches.) 

As  defense  to  action  at  law  upon  rescission,  297,  472. 

To  rescission  for  variance,  571n.  37. 
Pleading  delay,  451n.  41,  473n.  66. 

DIRECTORS : 

(See  also  Officers:  Disclosure  to,  see  Lawful  profits;  Directors  Lia- 
bility Act,  see  English  Companies  Act.) 
Agreements  interfering  with  control  of,  36,  38,  40. 

(See  Agreements  for  promotion  of  corporation.) 

Liability  for  unlawful  payments  made  to  promoters,  331. 

For  negligently  paying  promoters'  profits,  202n.  6. 


INDEX.  607 


[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

DIRECTORS— (Continued)  : 

For  negligently  paying  promoters'  compensation,  164. 

For  expenses  of  abortive  promotion,  561n. 

Effect  of  secret  agreement  to  share  promoter's  comi>ensatlon,  209n.  28. 
Liability  for  fraud  of  others  in  sale  of  shares,  362n.  2. 

For  fraud  of  agents,  368-9. 
Power  to  fix  promoters'  compensation,  162-4. 

Right  to  vote  for  assumption  of  contract  made  as  promoters,  91-2,  147. 
Right  to  vote  for  assumption  of  contract  to  which  parties,  92. 
Personal  liability  on  contracts  made  by  promoters,  143n.  51. 
Power  to  contract  for  proposed  corporation,  78. 

To  consent  to  promoters'  profits,  202-8,  229-30. 

To  ratify  promoters'  profits,  228-32. 

To  effectuate  rescission  or  affirmance,  230. 
Compensation  for  services  on  promotion,  159. 
Right  to  receive  gifts  from  vendors  to  corporation,  178-9,  489n.  24. 

From  promoters,  179n.  22. 

Of  qualifying  shares,  178,  329,  501. 

Accepting  agreement  to  repurchase  qualifying  shares,  179. 
False  representations  in  regard  to  identity  of.  404. 
Subscribing  for  shares,  vigilance  required,  471n.  5H. 
As  parties  defendant  to  minority  stockholders'  suits,  353n.  65. 

DISCLOSURE : 

(Of  promoters'  profits,  see  Lawful  profits;  Concealment  of  facts  as 
fraud  upon  subscribers,  see  False  representations.) 

DIVIDENDS : 

On  shares  of  constituent  company  pending  consolidation,  557. 

False  representations  In  relation  to  earned  by  constituent  company, 

427. 

Declaration  of  unearned  as  fraudulent  representation,  427,  503. 
Paid  on  shares  unlawfully  issued  to  promoters,  recovery  of,  311n.  24. 

DONATING  SHARES  TO  CORPORATION : 
(Donating  property,  see  Gifts.) 

No  implied  agreement  of  con>oration  to  pay  for  shares,  46. 
Agreement  to  use  shares  for  benefit  of  corporation,  enforcement,  47. 


608  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to  notes.] 

DUMMY  PROMOTERS : 

Joinder  of,  as  parties  defendant,  350-1. 
Concealing  identity  by  means  ef,  9,  219-20,  163n. 

DUMMY  STOCKHOLDERS: 

Disclosure  to,  of  promoters'  profits,  238,  211n.  32. 

DUTIES  OF  PROMOTER: 
In  general,  15-21,  171-3. 

i 

E. 

ELECTION : 

Of  remedies  by  corporation,  321,  326. 

Conclusive  effect  of,  327. 
Election  not  to  rescind, 

Effect  of,  on  other  remedies,  231n.  82. 

Power  of  directors  to  exercise  for  corporation,  230. 

Power  of  majority  stockholders  to  exercise  for  corporation,  231, 

346-7. 
Of  remedies  by  subscribers, 

Conclusive  effect  of  election  to  rescind  subscription,  459. 

What  amounts  to  disaffirmance,  459. 

Conclusive  effect  of  election  to  affirm,  464-5. 

What  constitutes  affirmance,  466-9. 

Election  to  affirm  not  a  bar  to  action  for  damages,  469. 

To  sue  for  personal  damages,  or  on  behalf  of  corporation,  239n.  96. 
By  promoters, 

To  avoid  rescission  by  making  good  representations,  327-8. 

To  avoid  liability  by  surrendering  payments  received  from  cor- 
poration, 191n.  55. 

EMINENT  DOMAIN:' 

Promoters'  contracts  and  surveys  as  bar  to,  137n.  31. 

EMPLOYEES  OF  PROMOTERS: 

Cannot  recover  compensation  from  corporation,  165. 
Unless  pursuant  to  charter  provision,  166. 
Or  unless  upon  subsequent  promise  of  corporation,  166. 


INDEX.  609 

[References  are  to  pages,  except  that  numbers 
following  an   "n"   refer  to  notes.] 

EMPLOYEES  OF  PROMOTERS— (Continued)  : 

May  recover  compensation  from  promoters,  165-9,  560. 

Unless  by  express  agreement  to  the  contrary,  168,  562-3. 
Interpretation  of  such  agreement,  168-9. 

If  services  rendered  under  express  contract,  must  show  performance, 
168. 

Or  that  performance  prevented  by  promoter,  367,  563n.  9. 
Recovering  compensation  from  subscribers,  565-6. 
Impressing  lien  on  property,  580n.  60. 

EMPLOYMENT : 

Agreements  for  employment  by  proposed  corporation, 
Validity  of,  between  parties,  34-6. 
Where  control  of  directors  infringed,  36-8. 
Obligations  of  corporation  thereunder,  121. 

ENGLISH  COMPANIES  ACT: 

Provisions  relating  to  prospectus,  362,  389-97,  429n.  85. 

Provisions  of  Directors  Liability  Act,  362-3,  424. 

Contribution  between  promoters,  550. 

Penal  provisions,  504. 

Commissions  for  procuring  subscriptions,  161n.  27. 

Inducements  to  particular  subscribers,  174n.  10. 

Rescission  of  subscription  after  insolvency,  474n. 

ESCROW : 

Delivery  in,  to  promoter,  138,  123n. 

ESTOPPEL : 

Of  promoter  to  question  corporate  existence,  88n.  25,  582n. 

Of  promoter  representing  that  property  is  to  be  transferred  to  corpora- 

tion,  580n.  60. 
Promoters  not  estopped  by  representation  that  shares  sold  are  treasury 

shares,  235n.  88. 

That  moneys  in  treasury  represent  subscription  moneys,  403. 
Of  corporation  by  acts  of  promoters,  76n.  2. 
Of  grantor  to  question  corporate  existence,  138. 
Of  subscriber  signing  in  blank,  123n. 

EVIDENCE : 

(See  Parol  agreements,  Statute  of  frauds,  Value.) 


€10  INDEX. 

[References  are  to  pages,  except  that  numbers 
following  an   "  n "   refer   to  notes.] 

EVIDENCE — (Continued)  : 

Declaration  of  promoter  as  evidence  against  corporation,  129. 

As  evidence  against  co-promoters,  538n.  17. 

Statements  made  at  stockholders'  meeting  as  evidence  against  corpora- 
tion, 442n.  15. 

Prospectus  as  evidence  of  illegal  purpose,  124n.  97. 
Cost  of  property  to  promoter  as  evidence  of  value  when  sold  to  cor- 
poration, 223,  492. 

As  evidence  of  promoter's  good  faith,  191n.  54. 
Of  participation  in  fraud,  350n.  55,  537n.  15. 
Of  abandonment  of  promotion,  570. 
Of  value  of  shares,  312-5,  487,  499n.  48. 
Contracts  made  for  corporation  by  promoter, 

Negotiations  of  promoter  as  evidence  of  terms,  129,  76n.  1. 
Evidence  of  assumption  by  corporation,  92-6. 

Where  promoter  as  officer,  acts  for  corporation,  91. 
May  prove  actual  rather  than  written  agreement,  121. 
Of  parol  agreement  that  promoters  shall  not  be  personally  liable, 

142. 

Evidence  to  connect  particular  promoter  with,  562n.  4. 
In  action  for  false  representation, 

That  promoter  did  not  believe  representations  to  be  true,  380. 

Grounds  of  promoter's  belief,  379n.  47. 

Of  sense  in  which  promoter  used  ambiguous  language,  425n.  72. 
Statements  at  stockholders'  meeting  as  evidence  against  corpora- 
tion, 442n.  15. 

Oral  representations  inducing  subscription,  462,  478-80. 
Evidence  of  similar  representations,  452n.  50. 
Subscription  agreements, 

Parol  agreement  that  subscription  to  be  paid  in  property,  407n.  10. 
That  subscription  not  to  be  enforced,  122,  408. 
Opinion  as  to  effect  of,  480n.  80. 
Oral  representations  inducing  subscription,  462,  478. 
'That  subscribers  were  to  be  liable  for  expenses  of  abortive  promo- 
tion, 566n.  18. 

EXECUTORS  AND  ADMINISTRATORS  OF  DECEASED  PROMOTERS : 
Actions  against,  351-2. 
Liability  on  promoter's  agreement  to  organize  corporation,  31n.  1. 


INDEX.  611 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

EXPENSES  OF  PROMOTION: 

(See  also  Abortive  promotions,  Compensation  of  promoters,  Employees 

of  promoters.) 

Promoters  liable  for  compensation  of  employees,  165-0. 
Reimbursement  by  corporation,  151,  165-6,  169. 

When  not  entitled  to  reimbursement,  152. 
Effect  of  fraud  on  promoters'  right  to  reimbursement,  160n.  24. 
Expenses  allowable, 

Legitimate  expenses,  152. 

Expenses  of  "  rigging  the  market,"  152. 

Of  bribing  officials,  152. 

Other  improper  expenses,  152-3. 

Unusual  expenses,  153. 

Interest  on  moneys  borrowed,  154n.  10. 

Moneys  paid  for  services  of  employees,  165-6,  169. 

F. 

FALSE  REPRESENTATIONS: 
(See  also  Prospectus.) 

Complaint   by  corporation   because  of  false  representation  made  to 
promoter,  433,  506,  437n.  3. 

Of  false  representation  made  by  promoter,  306,  433,  518. 
Compelling  promoter  to  make  representation  good,  308,  402-3,  487, 

306n.  12. 
Complaint  by  persons  who  purchase  property  with  view  to  transfer 

to  proposed  corporation,  435n.  2. 

Complaint  by  persons  induced  to  purchase  obligations  of  corporation, 
348. 

To  lend  money  to  corporation,  348. 
To  subscribe  for  shares  of  corporation,  363-4. 
To  purchase  shares  in  the  market,  363-4. 
To  purchase  shares  of  allied  corporation,  365n.  7. 
To  perform  services  as  broker  in  sale  of  shares,  367. 
To  donate  lands  to  corporation,  416n.  36. 
What  parties  liable  for, 

Representations  made  in  prospectus,  362. 

Under  English  Companies  Act,  362,  390n. 
Representations  made  by  agents  of  promoter,  367. 
By  agents  of  corporation,  368-0,  437-8. 


612  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to  notes.] 

FALSE  REPRESENTATIONS— (Continued)  : 
Repeated  by  others,  366,  372. 
Promoters  liable  in  solido,  539. 

Personal  representatives  of  deceased  promoter,  351. 
Corporate  liability  for  representations  of  promoter,  437-8. 
What  parties  entitled  to  complain, 
Of  representations  in  prospectus, 

In  general,  363.  « 

Subscribers,  363. 

Subscribers  who  did  not  read,  371. 

Purchasers  of  shares,  363-4. 

Corporation,  433. 

Persons  to  whom  representations  repeated,  366. 
Persons  present  when  representations  made  to  others,  367n.  14. 
Assignee  of  subscriber,  459n.  11. 

Broker  who  attempted  to  sell  shares  on  faith  of,  367. 
Inducing  cause,  representations  must  be,  369-73,  410,  414-5,  393n. 
Making  plaintiff  point  out  statement  which  induced  action,  370. 
Representations  made  after  plaintiff's  subscription,  371. 
Representations  inducing  plaintiff  not  to  withdraw  subscription, 

371-2. 

Representations  subsequently  corrected,  372. 
Reliance  upon  promoter's  representations,  369-73,  462. 
Effect  of  independent  inquiry,  372-3,  462. 
Effect  of  temporary   doubt,   373. 
Effect  of  partial  disbelief,  373. 

Effect  of  agreement  not  to  rely  on  representations,  373. 
Effect  of  notice  that  information  not  reliable,  383n. 
Defendant's  knowledge  of  falsity  of  representations,  373-81. 
Under  English  Companies  Act,  375. 
Statements  made  as  on  knowledge,  377-80. 
Knowledge  of  falsity  inferred  from  absence  of  reasonable  grounds 

for  belief,  380. 

Knowledge  subsequently  acquired,  377n.  44. 
Intentional  ignorance,  380. 
Innocent  concealment,  389. 

Under  English  Companies  Act,  389. 
Rescission  because  of  innocent  misrepresentation,  381. 

Liability  of  promoters  for  return  of  subscription  price,  445-6. 
Intent  to  deceive,  381,  388. 

Under  English  Companies  Act,  389n.  75. 


INDEX.  613 


[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

FALSE  REPRESENTATIONS— (Continued)  : 
Materiality  of  representation, 

In  general,  397. 

As  to  promoters'  interest  or  position,  400,  447. 

As  to  identity  of  promoters,  219-20,  163n. 

As  to  promoters'  profits,  399,  425-6,  428-32. 

As  to  directors,  404,  426,  427. 

As  to  advisory  board,  405n.  1. 

As  to  commercial  agents  of  corporation,  406. 

As  to  persons  selling  property  to  corjxjration,  400-1,  403,  427. 

As  to  value  or  cost  of  property  sold  to  corporation,  227,  308,  330, 
399-401,  425. 

As  to  reports  of  engineers,  etc.,  375,  404,  422,  383n. 

As  to  subscriptions,  406. 

As  to  number  of  shares  subscribed  for,  331,  406. 

Sham  subscriptions,  408. 

That  promoters  themselves  shareholders,  401-2. 

As  to  number  of  shares  in  treasury,  408. 

That  share  list  has  been  closed,  407n.  8. 

As  to  amounts  paid  in  to  corporation,  331n.  87. 

As  to  identity  of  subscribers,  409-11. 

As  to  character  of  other  stockholders,  412n.  23. 

As  to  price  paid  for  shares  by  others,  413. 

As  to  value  of  shares,  415,  426,  400n.  81. 

Wash  sales,  416,  503. 

That  shares  offered  are  treasury  shares,  414,  235n.  88. 

As  to  calls  made  on  shares,  398n.  78. 

As  to  legal  status  of  corporation  or  shares,  416. 

As  to  use  to  be  made  of  moneys  subscribed,  418. 

As  to  mortgage  on  corporate  property,  398,  427. 

As  to  debts  of  corporation,  427. 

As  to  dividends  paid  by  constituent  companies,  427. 

As  to  contracts  of  constituent  companies,  437n.  8. 

As  to  liabilities  of  constituent  companies,  331. 

Matters  of  opinion,  415,  417,  426,  443. 

As  to  future  actidh,  417,  443. 

That  shares  are  non-assessable,  417. 

Misstatements  of  matters  of  law,  398n.  78. 

Of  foreign  law,  398n.  78. 
Falsity  of  representations, 

In  general,  400-4,  406-7,  417-21,  404n.  1. 


614  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

FALSE  REPRESENTATIONS— (Continued)  : 
Must  be  substantially  false,  407n.  8. 
Representations  in  relation  to  future  action,  417,  443. 

That  shares  are  to  be  non-assessable,  417. 
Representations  subsequently  made  true,  384,  418. 
Statements  true  when  made  becoming  untrue  before  allotment, 

419,  377n. 
Concealment, 

Fraud  by  concealment,  384. 

Innocent  concealment,  389. 

Under  English  Companies  Act,  389. 

Rescission  because  of  concealment,  386-8. 

Concealment  of  promoters'  profits,  428-32,  446. 

Of  fact  that  directors  and  commercial  agents  receiving  shares  for 

acting,  406. 

That  concession  to  be  paid  for  by  corporation,  420n.  56. 
Of  fact  that  would  be  implied,  420. 

Of  fact  of  which  subscriber  had  independent  knowledge,  394n. 
Manner  of  making  false  representations, 
In  prospectus,  362-1. 
In  certificates  required  by  law  or  by  stock  exchanges,  365,  503, 

331n,  87. 

Repetition  by  others,  366,  372. 
By  agents,  367.  ^ 

By  issue  of  stock  certificates  before  legal  organization,  416. 
False  recital  in  deed,  399-100.  v 

FEDERAL  COURTS : 

Not  bound  by  decisions  of  state  courts,  359. 
Minority  stockholders'  suits   in,  341-3. 
Jurisdictional  amount  in,  341n.  23. 

Jurisdiction  of  suit  against  vendor  because  of  commission  paid  pro- 
moter, 511n.  10. 

FIDUCIARY  RELATION  OF  PROMOTERS: 
To  corporation,  16-19,  22-3. 
To  stockholders,  19. 
To  subscribers,  19,  172-4. 
Where  there  are  no  outside  subscribers,  237. 
To  those  who  subscribe  without  solicitation,  19n.  56. 


INDEX.  615 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to  notes.] 

FIDUCIARY  RELATION  OF  PROMOTERS—  ( Continued ) : 
To  future  subscribers,  20-1,  212-3,  246,  255-69. 
To  future  purchasers  of  shares,  21,  213,  236,  430. 

Of  treasury  shares,  21n.  60. 
To  each  other,  527-8. 
To  bondholders  or  other  creditors,  19. 
Theory  that  fiduciary  relation  dependent  upon  subscription  for  shares, 

12. 
Ends  with  termination  of  relation,  29. 

FRANCHISES : 

Granted  to  corporation  before  organization,  137n.  31. 
Title  to  franchise  which  corporation  is  expressly  organized  to  ac- 
quire, 139n.  42. 

FRAUD : 

(See  False  representations,  Secret  profits,  Remedies  of  corporation, 

Remedies  of  individual  stockholders.) 
Effect  of,  on  promoter's  right  to  compensation,  159. 

On  promoter's  right  to  reimbursement  for  expenses,  160n.  24. 
On  promoter's  right  to  enforce  lawful  claims,  318. 
On  promoter's  right  to  complain  as  minority  stockholder,  345. 
Upon  agreement  to  promote  corporation,  32-3. 

G. 

GIFTS: 

(See  Donating  sha'res  to  corporation.) 

Sales  to  corporation  of  property  received  by  promoter  as  gift,  196-6, 

222. 

Liability  of  promoters  or  directors  accepting  gifts,  178-80. 
Rights  of  persons  donating  proi>erty  to  corporation,  524. 

If  donation  induced  by  fraud  may  sue  for  damages,  416n.  36. 

GOOD  FAITH: 

Required  of  promoters,  16-21,  527-8. 

As  affecting  promoters'  secret  profits,  185. 

Of  promoters  selling  property  to  corporation,  190. 

Cost  of  property  as  evidence  of,  191n.  54. 


616  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to   notes.] 

GOOD  FAITH— (Continued)  : 

Required    of    officers    assuming    obligations    of    promoters'    con- 
tracts, 90. 

Corporation  not  called  upon  to  suspect,  293. 
Stockholders  not  called  upon  to  suspect,  293,  470. 
As  against  creditors,  478. 

I. 

IDEAS : 

No  property  right  in  mere  idea,  532. 

IDENTITY  OF  CORPORATION:  27,  570-1,  130n.  14,  572n.  37. 

IDENTITY  OF  PROMOTERS: 

(See  also  False  representations.) 

Effect  of  concealment  on  legality  of  profits,  163n. 

IMPLIED  WARRANTY: 

Of  promoter  conveying  lands  to  corporation,  191. 

INCORPORATORS : 

Power  to  contract  for  corporation, 

In  general,  77n.  4. 

In  regard  to  acts  necessary  to  perfect  organization,  78n.  4. 

Authority  granted  by  provisions  of  statute  or  charter,  78. 

Interpretation  of  such  provisions,  78n.  5. 

Can  act  only  by  majority,  109,  78n.  4. 
Not  as  such  entitled  to  proportionate  share  of  capital  stock,  49n.  43. 

INDEMNITY : 

Agreement  to  indemnify  provisional  committeemen  construed,  142n.  48. 
To  indemnify  subscriber  for  shares,  413,  123n. 

INJUNCTION : 

Restraining  transfer  of  shares  pendente  lite,  310-ln.  22. 
Restraining  departure  from  proposed  route,  572n.  38. 

INTEREST : 

Paid  by  promoters,  reimbursement,  154n.  10. 

On  proceeds  of  shares  unlawfully  taken,  310n.  21. 

On  subscribers'  deposits,  567-8. 


INDEX.  617 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

INTERPRETATION  AND  CONSTRUCTION : 

(See  Prospectus.) 

Of  agreements  to  organize  corporation  to  purchase  specific  property, 
42-5. 

To  pay  for  property  in  shares,  42-5. 

For  division  of  shares  of  corporation,  49-55. 

For  division  of  profits  of  promotion,  49-51. 
•  Restricting  sale  of  shares,  55. 

To  furnish  capital,  47,  48-9,  51,  54. 

Fixing  promoters'  compensation,  47. 

To  indemnify  provisional  committeemen,  142n.  48. 

That  promoter  not  liable  on  contract,  142,  168-9,  563. 
Of  statute  authorizing  ^corporators  to  contract  for  corporation,  78n.  5. 
Of  statute  providing  that  corporation  shall  pay  promotion  expenses,  166. 
Actions  involving  interpretation  of  charter  and  by-laws,  where  brought, 
359n.  87. 

J. 

JOINDER  OF  ACTIONS : 

Actions  arising  out  of  promoters'  frauds, 

In  general,  355-8,  451-3. 

In  suits  by  or  on  behalf  of  corporation,  355-8. 

Demand   for  individual   relief,   with  demand   on  behalf  of  cor- 
poration, 358,  451. 

Demand  for  rescission  of  subscription,  and  right  claimed  there- 
under, 358. 

Different  demands  against  different  defendants,  358,  453,  4! 

Demand  against  corporation  for  rescission,  and  promoters  for  re- 
payment of  subscription  price,  453. 

Demand   against   corporation   for   rescission,   and   promoters 
fraud  and  deceit,  453n.  51. 

Joinder  of  several  subscribers  demanding  accounting  for  promot 

profits,  451. 

Rescission  of  subscriptions,  451-2 
In  action  for  fraud  and  deceit,  452. 

Action  for  services  rendered  promoters  Individually,  with  act! 
corporation,  147n.  67. 


618  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to  notes.] 

JOINDER  OF  PARTIES : 
Parties  plaintiff, 

Creditors  of  corporation  and  subscribers  for  shares,  452n.  47. 
Several  subscribers  demanding  rescission  of  subscriptions,  451-2. 
Demanding  damages  for  fraud  and  deceit,  452. 
Demanding  accounting  for  promoters'  profits,  451. 
Corporation    and    promoters    in    action    on    promoters'    contract, 

132n.  15. 

Purchaser  and  his  subsequent  vendee  deceived  by  similar  .repre- 
sentations, 452n.  50. 
Parties  defendant, 

One  or  all  fraudulent  promoters,  349. 

Vendor  and  promoters  defrauding  corporation,  330,  349. 

Vendor  and  promoters  in  action  for  rescission,  545-50. 

Agent  of  vendor  and  promoter  with  whom  he  divides  commission, 

349-50. 

Promoters  and  their  agents,  349n.  52. 
Promoters  and  their  dummies,  350-1. 

Promoters  and  persons  receiving  share  of  profits,  351,  539n.  18. 
Promoters  and  persons  who  aid  in  fraud,  350. 
Promoters  and  those  who  aid  in  procuring  subscriptions,  350. 
Personal  representatives  of  deceased  promoter,  352. 
Corporation  and  promoters,  in  action  for  rescission  of  subscrip- 
tion, 445-6,  453. 

Promoters  in  action  by  corporation  on  promoters'  contract,  133n.  15. 
Promoters  and  corporation,  in  action  on  promoters'  contracts,  147. 
Corporation,  promoters  and  favored  vendors  in  action  on  secret 

agreement,  356. 

In  action  for  recovery  of  deposits  on  shares  of  abortive  corpora- 
tion, 575-6. 

Corporation   not   necessary   party   to   suit   involving   transfer   of 
shares,  58n.  6. 

Nor  to  action  for  fraud  and  deceit  against  promoters,  437n.  3. 
Nor  to  action  for  damages  for  false  representations  made  to 

corporation  and  subscribers,  434-5. 
Nor  to  action  for  fraud  committed  on  holders  of  securities 

of  reorganized  company,  558. 
Parties  defendant  in  minority  stockholders'  suits,  352-3. 

After  receivership,  340,  353. 
To  suits  by  creditors  to  enforce  corporate  rights,  348. 


INDEX.  619 


[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to  notes.] 

JOINT  AND  SEVERAL  LIABILITY  OF  PROMOTERS: 

(See  Liability  of  promoters,  Contribution  between  promoters.) 
For  each  others'  acts  in  general,  536-8. 

Where  they  join  for  personal  profit,  537-8. 

For  joint  fraud,  349,  539. 

For  secret  profits,  349,  539-45. 
Upon  rescission  of  corporate  purchase,  545. 
Upon  contracts  authorized  by  them,  144. 
For  expenses  of  abortive  promotion,  560. 
For  return  of  deposits,  572-3. 

JURISDICTION: 

(See  also  Federal  courts.) 

Actions  against  promoters  generally  transitory,  358. 

Where  interpretation  of  charter  and  by-laws  involved,  359n.  87. 

K. 

KNOWLEDGE : 

(See    also    Notice,    Contracts    of    promoters,    False    representations. 

Laches. ) 

Necessary  to  make  promoters'  contracts  binding  on  corporation,  110-11. 
Necessary  to  make  election  of  remedy  conclusive,  464-6. 
Necessary  to  defense  of  laches,  292,  295. 


LACHES : 

In  general,  291-7,  469. 

What  amounts  to  unreasonable  delay,  293-5. 
May  depend  upon  relief  demanded.  296. 

Consideration  that  corporation  necessarily  acts  slowly,  294-5. 
Particularly    when    acting    against    opposition    of    directors, 

295n.  54. 

Consideration  of  fiduciary  relation,  295. 
When  no  actual  fraud  involved,  295. 
Where  property  is  of  fluctuating  value,  294. 
Delay  in  discovering  fraud,  292-3,  46J>-71,  478. 
Where  rights  of  creditors  involved,  478. 
Delay  in  making  investigation  after  suspicions  aroused,  471. 


620  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to  notes.] 

LACHES— (Continued)  : 

After  subscriber  puts  himself  at  arm's  length,  465n.  34. 
Lack  of  diligence  in  prosecuting  suit,  294. 
From  what  time  delay  computed,  292-4,  470-1. 

Time  consumed  in  investigation,  293. 

In  negotiations  for  settlement,  294,  471-2. 

Postponement  of  action  at  request  of  defendants,  471. 

No  laches  until  after  knowledge,  292. 

Knowledge  of  what  persons  starts  time  running  against  corpora- 
tion, 295-6. 

Against  minority  stockholder,  296. 

Laches  as  defense  to  rescission  of  subscriptions,  469-71,  473. 
As  defense  to  liability  of  promoters  on  rescission  of  subscription  in- 
duced by  fraud,  446. 

Delay  as  defense  to  action  at  law  upon  rescission,  297,  468-9,  472. 
Pleading,  294n.  49,  451n.  41. 

LAW  AND  EQUITY : 

Actions  for  fraud  and  deceit,  353,  325n.  67,  437n.  3. 
For  recovery  of  promoters'  profits,  353. 
Rescission,  354-5,  449-50. 
Minority  stockholders'  suits,  354. 
Recovery  of  deposits  upon  abortive  promotion,  574-5. 
Recovery  of  compensation  paid  promoters  under  mistake,  163n. 

LAW  AND  FACT : 

(See  Questions  of  law  and  fact.) 

LAWFUL  PROFITS : 

(See  also  Compensation  of  promoters.) 
Four  methods  of  legalizing  profits,  199-201. 
Burden  of  proof,  201. 

Disclosure  to  independent  board  of  directors,  200,  202-8,  229-30. 
Where  promoter  is  himself  a  director,  202-3. 

Or  controls  directors,  203—4. 
Where  single  director  interested,  204-6. 
Where  facts  misrepresented  to  directors,  206. 
Where  identity  of  promoters  concealed,  163n. 

Limits  of  directors'  power  to  allow  promoters'  profits,  206-7,  230, 
232. 


INDEX.  621 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to  notes.] 

LAWFUL  PROFITS— (Continued)  : 

Disclosure  to  subscribers,  200,  208-14,  229-32,  235-7. 
Must  be  made  to  each  subscriber,  210-11. 
Dummy  subscribers  disregarded,  238. 
To  all  beneficial  owners  of  shares,  211-12. 
To  future  subscribers,  212-13,  246-G9. 
To  future  purchasers  of  shares,  213-4,  232-46. 
To  future  purchasers  of  treasury  shares,  213-4,  250-6. 
Effect  of  representation  that  shares  offered  are  treasury  shares, 

253-4. 
Nature  of  disclosure, 

Must  be  full  and  complete,  214-8,  224n.  60. 
Doctrines  of  constructive  notice  inapplicable,  214,  217-& 
Knowledge  chargeable  to  subscribers,  217-18. 
When  facts  actively  misrepresented,  218. 
Waiver  of  disclosure,  218-9,  271-2. 
Facts  to  be  disclosed,  219-27. 
Promoters'  interest,  219-21. 
Identity  of  promoters,  219-20,  163n. 
Control  of  board  of  directors,  221. 
Directors'  interest  in  promoters'  profits,  221n.  60. 
That  promoters'  attorney  is  attorney  for  company,  22L 
That  promoters  will  not  exercise  option  unless  company  Is  floated, 

221. 

That  promoters  have  no  binding  contract,  222. 
Price  paid  for  property  by  promoters,  222-7. 

Where  corporation   represented   by   independent   board  of  direc- 
tors, 226,  220n.  56. 

Amount  of  promoters'  profits,  219-227. 
Amount  of  commission  received  by  promoter,  177n.  14. 
Facts  otherwise  known  to  subscribers,  394n. 
Ratification, 

By  stockholders,  227-232. 

Must  be  formal  act,  231n.  82. 

By  majority  vote,  228-32,  346. 

When  further  issue  of  shares  contemplated,  228. 

Where  shares  were  issued  to  promoters  in  violation  of  statute, 

228n.  74. 

Right  of  promoters  to  vote  as  stockholders,  232. 
By  board  of  directors,  228-32. 


622  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to   notes.] 

LAWFUL  PROFITS— (Continued)  : 

Legality  of  profits  where  promoters  are  themselves  sole  subscribers, 
232-269. 

Reasons  for  rule,  233-7. 

Subsequent  re-sale  of  shares  immaterial,  232-7,  246-8,  257,  265-9. 

Effect  of  previous  sale  of  shares,  238-46. 

Dummy  subscribers  disregarded,  238. 

Effect  of  existing  syndicate,  239-46. 

Transaction  when  deemed  consummated,  260-3.          • 

When  promoters  merely  hold  options,  234n.  86. 

Effect  of  subsequent  sale  of  shares  by  direct  subscription,  246-9, 
255-69. 

Not  contemplated  at  time  of  transaction,  248. 

Effect  of  unsuccessful  attempt  to  sell  shares  by  subscription,  249. 

Effect  of  subsequent  sale  of  shares  donated  to  treasury  by  pro- 
moters, 250-5,  21n.  60,  233n.  85. 

Effect  of  representation  that  shares  offered  are  treasury  shares, 
253-4,  239n.  96. 

Effect  of  fraud  on  parties  accepting  shares  in  payment  for  prop- 
erty, 242-3,  521. 

LEASEHOLD : 

Rescission  of  purchase — restoration  of  status  quo,  323. 

LIABILITY  OF  CORPORATION : 

(See  also  Contracts  of  promoters,  Compensation  of  promoters,   Ex- 
penses of  promotion.) 

Accepting  property  acquired  by  promoters,  112-7. 
Express  assumption  of  promoters'  obligations,  116. 
Express  assumption  of  partnership  obligations,  116n.  84. 

Tort  liabilities,  116n.  84. 

Secret  understanding  excluding  certain  claims,  116n.  84. 

Priority    between    debts    assumed    and    subsequent    obligations, 

116n.  84. 

Taking  over  assets  of  partnership  or  other  corporation,  116n.  84,  118n. 
Taking  over  business  as  of  past  date,  121. 
Liable  on  actual  rather  than  written  agreement,  121-2. 
For  fraud  of  promoters,  437-8,  440-7. 
For  services  rendered  to  promoters,  114. 

For  services  of  persons  assisting  promoters  in  organization,  165-9. 
For  moneys  loaned  to  promoters,  113n.  76,  120n.  87. 
For  moneys  loaned  by  promoters,  188n.  47. 


INDEX.  623 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

LIABILITY  OF  PROMOTERS : 

(See   Secret   profits,   Remedies  of  corporation,   False  representations. 
Contracts   of   promoters,    Abortive    promotions.    Shares,   Joint   and 
several  liability,  Contribution  between  promoters.) 
Duties  and  responsibilities  in  general,  15-21,  171-3. 
Courts  careful  to  protect  from  unjust  liability,  267-8. 
Diverting  proceeds  of  treasury  shares,  233-4n.  85. 
Taking  more  shares  than  entitled  under  promotion  agreement,  39n.  19. 
Accepting  shares  in  payment  for  services  gratuitously  rendered,  164. 
On  corporation's   refusal   to  deliver  shares  in  accordance  with  pro- 
motion agreement,  45. 

For  compensation  paid  under  mistake,  163n. 
Issuing  certificates  before  legal  organization,  416. 
On  contracts  made  for  corporation,  84,  91-2,  106,  139-47. 

After  liability  assumed  by  corporation,  144-7. 

Where  opposite  party  also  a  promoter,  141n. 

Misrepresenting  authority  to  act  for  corporation,  141n. 

On  ultra  vires  contracts,  121n.  89. 
On  promises  made  as  inducement  to  subscriptions,  124. 

On  agreement  to  repurchase  shares,  123n.,  124n.  95. 
Upon  rescission  of  subscriptions  induced  by  their  fraud,  445-6,  453. 

Laches  as  a  defense  to  such  liability,  446. 

Upon  rescission  by  corporation  because  of  commissions  paid  to  pro- 
moter, 547-50. 

For  personal  injuries  done  pending  promotion,  141n.  46. 
For  acts  of  co-promoters,  536-8,  560-2. 
On  contracts  made  by  co-promoters,  142-4. 
To  corporation  for  frauds  on  co-promoters,  533. 
For  services  rendered  by  co-promoters,  551,  563. 
For  professional  services  of  co-promoters,  166-7,  578. 
For  compensation  of  assistants  on  promotion,  165-9,  600-3. 

What  promoters  liable,  167-8,  560-2. 
For  expenses  of  abortive  promotion,  560-5. 
For  re-payment  of  deposits  on  abandonment  of  promotion,  567-0,  672, 

574-6. 

For  par  value  shares  upon  insolvency,  313-14,  488,  187n.  44. 
For  debts  of  defectively  organized  corporation.  581-8. 
Organizing  corporation  for  Illegal  purpose,  582n. 
Liability  to  co-promoters, 

Excluded  from  promotion,  528-33. 


624  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to   notes.] 

LIABILITY  OF  PROMOTERS— (Continued)  : 
For  secret  profits,  527. 

For  compensation  of  co-promoters,  166-7,  551,  563. 
Liability  in  solido, 

Upon  rescission  of  corporate  purchase  induced  by  fraud,  545. 

For  unlawful  profits,  539-45. 

For  fraud,  539. 

For  acts  of  co-promoters,  142-4,  560-2.  « 

LIENS : 

Action  for  breach  of  agreement  to  transfer  shares  and  to  impress  liea 
thereon,  63n.  20. 

Rescinding  subscriber  not  entitled  to  lien  on  corporate  property, 
442n.  15. 

Employee  of  promoter  when  entitled  to  lien  on  property  to  be  con- 
veyed to  corporation,  580n.  60. 

Mechanics'  liens,  71. 

Vendors'  liens,  70. 

LOANS : 

Liability  of  corporation  for  loans  to  promoters,  113n.  76,  120n.  87. 

Promoters  not  entitled  to  reimbursement  for  interest  paid  on,  154n.  10. 

To  promoters  to  be  repaid  when  money  received  from  corporation, 
142n.  47. 

By  promoter  to  corporation,  188n.  47. 

To  corporation,  induced  by  fraud  of  promoters,  348. 

To  promoters  on  security  of  shares  unlawfully  taken,  312. 

Estoppel  of  promoter  to  claim  that  moneys  in  treasury  represent  loans 
to  corporation,  403. 

Persons  agreeing  to  lend  money  for  purchase  not  liable  on  note  given 
in  payment,  143n.  55,  144n.  55. 

Fraud  as  defense  to  action  for  money  borrowed  to  pay  subscrip- 
tion, 451. 

Agreement  to  advance  money  to  vendor  to  perfect  title,  34n.  9. 

M. 

MEASURE  OF  DAMAGES: 
(See  Burden  of  proof.) 
In  actions  for  breach  of  agreement  to  promote  corporation,  66-8. 

Uncertainty  of  damages  as  ground  for  denying  relief,  59,  67-8,  70. 


INDEX.  625 

[References  are  to  pages,  except  that  numbers 
following  an   "  n "   refer  to  notes.] 

MEASURE  OF  DAMAGES— (Continued)  : 

In  case  of  unlawful  sale  of  promoters'  property  to  corporation,  481, 

487-95,  190n.  53. 

"  Damages  "  distinguished  from  "  profits,"  305n.  11. 
Measure  of  value  of  property,  490-3. 

Measure  of  recovery  on  accounting  for  unlawful  profits,  309-15,  481-5. 
Allowance  for  compensation  and  expenses,  159-60,  309,  484. 
In  action  to  recover  unlawful  commission,  bribes,  etc.,  485. 

To  recover  securities  unlawfully  taken,  309-18,  485. 
To  recover  proceeds  of  sale  of  shares  unlawfully  taken. 

Interest,  310n.  21. 

Dividends,  311n.  24. 
Equity  if  possible  frames  decree  to  avoid  benefit  to  guilty  promoters, 

278-9,  316. 

Value  of  shares,  how  determined,  66-8,  312-5,  487. 
Value  of  bonds,  how  determined,  490. 
In  actions  for  false  representations,  486,  495. 

Representations  subsequently  made  true,  418-9. 

Misrepresentations  of  amount  of  promoters'  profits,  486-7. 

Compelling  promoter  to  make  representations  good,  308,  831,  487, 

306n.  12,  496n. 
In  case  of  rescission,  485. 
In  minority  stockholders'  suits,  493. 
In  action  by  promoter  to  enforce  unlawful  sale,  322o.  59. 

MECHANICS'  LIENS: 
(See  Liens.) 

MINORITY  STOCKHOLDERS : 
Reorganization  in  fraud  of,  556. 
Sue  only  in  right  of  corporation,  264. 
Suits  by,  in  Federal  courts,  341. 
What  must  show  to  maintain  suit,  337-40. 
Suit  by  unregistered  owner  of  shares,  338n.  11. 
Pleading  request  and  refusal,  338n.  12. 
Suits  after  receivership,  340-1.  353. 

After  bankruptcy,  340n.  20. 
Suits  by  other  than  original  subscribers,  341. 
Suit  always  in  discretion  of  court,  345. 
Where  advisability  of  suit  open  to  question,  345. 


626  INDEX. 

[References  are  to  pages,  except  that  numbers 
following  an   "  n "   refer   to  notes.] 

MINORITY  STOCKHOLDERS— (Continued)  : 

Rescission   at  suit  of   minority  stockholder,  345. 

Necessity  of  offer  to  restore,  347. 

Rescission  of  transaction  subject  to  ratification  by  majority,  346-7. 
Suit  to  enjoin  consummation  of  unlawful  transaction,  321n.  58. 
Intervening  to  defend  suit  against  corporation,  347. 
Parties  defendant  in  minority  stockholders'  suits,  352. 
Joinder  of  actions,  358,  451. 
Measure  of  damages,  493. 
Expenses  of  suit,  337n.  10. 
Defenses  to  suits  by  minority  stockholders, 

That  plaintiff  or  transferor  acquiesced  in  transaction,  283,  343-4. 
Committed  other  fraud  on  corporation,  345. 
That  plaintiff  acquired  shares  in  violation  of  statute,  282. 
Purchased  shares  for  purpose  of  bringing  suit,  344. 
Purchased  shares  with  knowledge  of  fraud,  344.        / 
After  fraud  complained  of,  341-3. 
Maintains  suit  for  ulterior  purpose,  289. 
Defense  of  settlement  with  majority  stockholders,  289. 
Defense  of  settlement  with  other  promoters,  494. 
Laches,  295-6,  295n.  54. 
Statute  of  limitations,  354n.  72. 

MORTGAGES : 

Unlawfully  taken  by  promoter, 

Remedies  of  corporation,  315,  329. 

Unenforceable,  316-8,  329. 

Cancellation  of,  rescission  of  entire  transaction,  327-8, 

On  property  of  corporation,  concealment  of,  398,  427. 

N. 

NOTES : 

Of  corporation  unlawfully  taken  by  promoter, 

Remedies  of  corporation,  315,  329. 

Unenforceable,  316-8,  329. 
Given  in  payment  for  services,  155n. 
In  payment  of  subscription  to  shares, 

Fraud  as  a  defense  to,  451,  450n.  41. 

Cancellation  for  fraud,  450-1. 

Status  of,  upon  abandonment  of  promotion,  569. 


INDEX.  627 


[References  are  to  pages,  /  except  that  numbers 
following  an   "n"   refer  to  notes.] 

NOTICE : 

(See  also  Constructive  notice.) 

Notice  to  promoter  as  notice  to  corporation,  125. 

Where  promoters  are  sole  stockholders,  125-6,  258. 
Notice  putting  stockholders  on  inquiry,  llln.  74. 
Putting  third  parties  on  inquiry  as  to  promoter's  fraud,  Slln.  23. 
Transactions  at  meetings  as  notice  to  stockholders,  217n.  46. 
Notice  to  proxy  as  notice  to  stockholder,  471,  218n.  46. 

o. 

OFFICERS-: 

(See  also  Directors.) 

Agreements  as  to  officers  of  proposed  corporation, 

Validity  between  parties,  38. 

When  binding  on  corporation,  121,  38n.  16. 

Agreements  for  compensation  of,  121. 
Liability  for  unlawful  payments  made  to  promoter,  331-2. 
Liability  of  sureties,  331-2. 

OPTIONS : 

Rights  of  promoter  under,  528-31,  302n.  6. 

After  expiration  of  rights  of  corporation  under,  197. 
Liability  of  corporation  delaying  until  expiration  of  promoter's  option, 

302n.  5. 

Promoter  holding  option  not  "owner"  of  property,  193-5. 
When  promoters  are  sole  subscribers,  234n.  86. 
Concealing  intention  not  to  exercise,  221. 
Option  of  subscriber  to  re-sell  shares  to  promoter,  validity  of,  413,  123n. 

ORDINANCES:  (See  Franchises.) 

OWNERSHIP  OF  PROPERTY:  (See  Selling  property  to  corporation.) 

P. 

PARLIAMENTARY  DEPOSITS:  578. 

PAROL  AGREEMENTS : 

(See  Statute  of  frauds,  Evidence.) 

Parol  understanding  that  promoters  not  liable  on  contract,  142. 


628  INDEX. 


[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer  to  notes.] 

PAROL  AGREEMENTS— (Continued)  : 

Corporation  assuming  promoter's   agreement   held   to   actual  rather 

than  written,  121. 

Varying  terms  of  subscription  agreement,  122,  408. 
That  unconditional  subscription  to  be  paid  in  property,  407n.  10. 

PARTIES  TO  ACTIONS : 
(See  Joinder  of  parties.) 

Parties  plaintiff  in  action  for  fraud  on  corporation, 
The  corporation,  334-6. 
Its  assignee,  336. 

Rescission  at  suit  of,  336n.  7. 
Its  receiver,  336-7. 
(See  also  Minority  stockholders,  Creditors  of  corporation.) 

PARTNERS : 

(See  Defective  organization  of  corporation.) 

Promoters  are  not,  142-3,  536,  560. 

Rights  and  liabilities  of  promoter's  partners,  12. 

Representation    by,    that    promoter   will    not    ask   compensation, 
158n.  18. 

PARTNERSHIP  NAME: 

Organizing  corporation  under,  582n. 

PERSONAL  PROPERTY: 

Title  to,  which  corporation  expressly  organized  to  acquire,  139. 

PERSONAL  REPRESENTATIVES  OF  PROMOTERS: 
Actions  against,  351-2. 
Joinder  of,  in  action  against  surviving  promoters,  352. 

PLEADING : 

Contract  of  promoters  assumed  by  corporation,  149-50. 

Connecting  promoter  with  fraud  of  co-promoter,  537n.  15. 

In  action  for  cancellation  of  promoters'  shares,  311n.  22. 

In  action  to  recover  commissions  promised  to  promoter,  514n.  22. 

In  action  for  rescission,  355. 


INDEX.  629 

[References  are  to  pages,  except  that  numbers 
following  an   "  n "   refer  to  notes.] 

PLEADING— (Continued)  : 

In  action  upon  rescission,  473n.  66. 

Pleading  delay  as  a  defense,  451n.  41,  473n.  66. 
Pleading  laches,  294n.  49. 

Pleading  circumstances  excusing  laches,  294n.  49. 
Complaint  in  minority  stockholders'  suits,  338,  284n.  26,  338n.  12. 

In  minority  stockholder's  suit  demanding  rescission,  347. 

Acquiescence  of  plaintiff  stockholder  as  defense,  284n.  26, 

PLEDGEE : 

Recovery  of  shares  in  hands  of,  312. 

PROFITS  OF  PROMOTERS : 

(See  Secret  profits,  Lawful  profits,  Compensation  of  promoters.) 

PROMOTERS : 

Defined,  4-6,  15. 

Explanation  of  term,  1. 

Early  use  of  term,  2. 

Origin  of  term,  14. 

Use  in  America,  14-15. 

Circumstances  that  create  the  relation,  6-13,  15. 

Solicitation  of  subscriptions,  8. 

Signing  certificate  of  incorporation,  8. 

Attending  to  formalities  of  incorporation,  8. 

Assisting  promoters,  9. 

Sharing  in  promoter's  profits,  9. 

Carrying  on  promotion  by  agents,  9. 

Selling  property  to  corporation,  9. 

Selling  property  to,  and  assisting  in  organization  of,  corporation, 
9-10. 

Acting  as  banker  pending  organization,  11. 

Acting  as  solicitor  for  prospective  company,  1L 

Subscribing  for  shares,  12. 

Partners  of  promoters,  12. 

Corporations  as  promoters,  13. 
Effect  of  the  relation,  15-21. 
Commencement  and  termination  of  relation.  21-0. 
Partnership  relation  between,  142-4,  536,  560. 


630  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

PROPERTY  PURCHASED  BY  PROMOTERS: 

(Before  commencement  of  relation,  see  Selling  property  to  corpora- 
tion; After  commencement  of  relation,  see  Purchase  and  re-sale  to 
corporation;  see  also  Conveyances,  Franchises,  Public  grants,  Sur- 
veys, Personal  property.) 

Recovery  by  vendor  if  corporation  not  organized,  in  accordance  with 
agreement,  68-71. 

Or  if  corporation  refuses  to  carry  out  promises  of  promoter,  69-70. 
Recovery  of  value  of  property  conveyed,  68. 
Compelling  corporation  to  issue  shares  in  payment  for,  63. 
Right  of  corporation  to  compel  conveyance  of,  99-100,  135. 
Without  paying  trustee's  compensation,  100. 
After  refusing  to  take  property,  135n.  26. 
Statute  of  frauds,  136a  27. 
Rights  in,  pending  promotion,  41,  135-9,  528-33. 
Upon  abandonment  of  promotion,  529-31,  579. 

PROSPECTUS : 

False  representations  in, 

What  parties  liable  for,  362,  436-8. 

Under  English  Companies  Act,  362,  390n. 
Who  entitled  to  complain  of,  348,  363,  367. 

Subscriber  who  did  not  read,  371. 

Who  received  prospectus  after  subscription,  371. 

The  corporation,  433-4. 
Interpretation  of  prospectus, 

General  rules,  419-21. 

Marginal  notes,  421. 

In  light  of  particular  complainant,  421,  461n.  18. 

In  light  of  preliminary  character,  422. 

Present  sometimes  read  as  future  tense,  422. 

Reports  accompanying  prospectus,  422. 
Quoted  in  prospectus,  383n. 

Ambiguous  language,  422. 

Particular  representations,  415-16,  425. 

PROVISIONAL  COMMITTEEMEN :  560n.  4. 

PROXIES : 

Right  of  promoter  to  vote  on  resolution  fixing  compensation,  164n.  38. 


INDEX.  631 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

PROXIES— (Continued)  : 

Notice  to  as  notice  to  stockholder,  471,  218n.  46. 
Attendance  by  as  election  to  affirm  subscription,  467n.  43. 

PUBLIC  GRANTS: 

To  corporation  not  yet  formed,  137n.  31. 

PUBLIC  POLICY: 

(See  also  Unlawful  purpose.) 

Agreements  for  withdrawal  of  opposition  to  charter,  106. 

Agreement  that  corporation  shall  purchase  specific  property,  31-4. 

Or  employ  specified  persons,  34-8. 

Or  elect  specified  officers,  38. 
Agreements  contemplating  fraud  or  violation  of  statute,  32-4,  39n.  18. 

Interfering  with  control  of  stockholders  or  directors,  36-7,  40. 

Depriving  corporation  of  power  to  increase  stock,  41. 

Or  change  number  of  directors,  41n.  25. 

Corporation  cannot  assume  contract  contrary  to  public  policy,  118-20. 
Collateral  conditions  contrary  to,  no  defense  to  subscription,  124n.  97. 

PURCHASE  AND  RE-SALE  TO  CORPORATION: 

(For  matters  relating  to  property  purchased  before  commencement  of 
relation,  see  Selling  property  to  corporation ;  As  to  when  relation 
commences,  see  Commencement  of  relation  of  promoter.  When. 
property  deemed  to  be  acquired,  see  Selling  property  to  corporation. 
See  also  Lawful  profits.) 

Promoters'  profits  on  re-sale  unlawful,  180-2. 
(How  made  lawful — see  Lawful  profits.) 
Profits  derived  by  buying  in  liens  at  a  discount,  182. 
Property  actually  worth  price  paid  to  promoters,  185,  190,  314, 

190n.  53. 

Property  purchased  during  temporary  abandonment  of  scheme,  27. 
Effect  of  change  in  proposed  corporation,  27. 

Where  property  purchased  before  commencement  of  relation,  181-2, 
187,  192,  220,  222-7,  301-5. 
When  treated  as  purchased  for  corporation,  198,  306-8,  483. 

PURCHASE  OF  PROPERTY: 

(See  Property  purchased  by  promoters,  Purchase  and  re-sale  to  cor- 
poration. ) 


632  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to   notes.] 

PURCHASE  OF  PROPERTY— ( Continued )  : 

Agreement  for  purchase  of  property  by  corporation  to  be  organized, 
Validity  between  parties,  31-2. 
Not  binding  upon  corporation,  31-2. 
When  unenforceable  between  parties,  32-4. 

PURCHASERS  OF  SHARES : 

(See  Subscribers,  False  representations,  Remedies  of  individual  stock- 
holders. ) 

Fiduciary  relation  of  promoter  to,  21,  430. 
Secret  profit  of  promoter  as  fraud  upon,  232-S,  250-69,  429. 
Right  to  assume  that  property  purchased  worth  par  value  of  shares 

issued  therefor,  432. 

When  entitled  to  sue  on  representations  in  prospectus,  363-4. 
Purchasers  of  shares  of  abortive  corporation,  574. 

Q. 

QUESTIONS  OF  LAW  AND  FACT : 
Undue  delay,  473n.  66. 

Assumption  by  corporation  of  liability  on  promoter's  contract,  92. 
Agreement  that  promoter  not  liable  for  compensation  of  employee, 

169n.  62. 

Purchase  of  property  for  corporation,  25n.  70. 
Authorization  of  co-promoter,  561-2n. 

R. 

RAILROADS : 

Agreement  of  promoters  as  to  location  of  route,  121n.  89. 
Rescission  of  subscriptions  because  of  departure  from  prescribed  route, 
572n.  38. 

Injunction  to  restrain  departure,  572n.  38. 
Rights  of  under  surveys  made  by  promoters,  137n.  31. 
Surveys  of  promoters  as  bar  to  condemnation  by  other  road,  137n.  31. 
Promotion  expenses  as  item  of  value  in  fixing  rates,  152n.  2. 
Railways  Abandonment  Act,  578n.  58. 

RATIFICATION : 

(See  Lawful  profits,  Contracts  of  promoters.) 


INDEX.  G:::i 


[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

REAL  PROPERTY: 

(See  Property  purchased   by  promoters,  Statute  of  frauds,  Convey- 
ances, Franchises,  Public  grants.) 

RECEIVERS : 

Appointment  of,  because  of  promoters'  control  and  mismanagement, 

311n.  22. 

Suits  by,  against  promoters,  336. 
Suits  by  foreign,  336n.  8. 
Suits  by  minority  stockholders  after  appointment  of,  340,  353. 

RECOVERY  OF  EXPENSES : 

(See  Expenses  of  promotion,  Abortive  promotions.) 

Recovery  of  expenses  incurred  in  furtherance  of  abandoned  project,  70. 

REIMBURSEMENT  FOR  EXPENSES: 

(See  Expenses  of  promotion,  Abortive  promotions.) 

REMEDIES  OF  CORPORATION : 

Adequate  remedy  to  be  freely  granted,  333. 
Remedy  of  accounting  for  profits,  301-18. 

Where  promoter  after  inception  of  relation  purchases  property  and 

re-sells  to  corporation,  301-5. 

Where  property  acquired  by  promoter  before  commencement  of 
relation,  301-5,  324. 

Exceptions  to  rule,  198,  306-8,  330. 
Rescission  not  necessary,  308. 
Right  of  promoter  to  allowance  for  services,  309. 
Measure  of  recovery  on  accounting,  309-15,  481-6. 
Where  profits  taken  in  shares,  309-15,  329. 
In  bonds  or  other  obligations  of  the  company,  315-8,  329,  490. 
Rescission  of  purchase,  301-3,  318-28. 

Must  appear  that  defendant  at  sometime  owned  property,  820. 

Must  be  in  toto,  320. 

Where  fraud  affects  only  one  of  several  parcels,  320. 

Where  fraud  affects  one  of  several  promoters,  320. 

Methods  of  effecting,  321,  354-6,  449. 

Restoration  of  status  quo,  321-3,  448. 

Tender,  to  whom  made,  322n.  59. 

Where  restoration  Impossible,  321-3. 


634  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to   notes.] 

REMEDIES  OF  CORPORATION— (Continued)  : 
Trifling  changes  disregarded,  322n.  60. 

Where  restoration  rendered  impossible  by  defendant,  321-3. 
Accounting  for  use  of  property  before,  322n..59. 
Of  purchase  from  third  party  because  of  fraud  of  promoter,  330, 

506-14,  518-20. 

Action  for  damages  for  fraudulent  sale  by  promoter  to  corporation,. 
301-3,  323-6. 

"  Damages  "  and  "  Profits  "  distinguished,  305n.  11. 
Remedies  against  promoter  unlawfully  taking  shares,  309-15. 
Recovery  from  promoter  of  commissions  received  by  him,  328-30. 
Of  moneys  or  securities  received  by  him,  328-9. 
Of  qualifying  shares  received  by  him,  329. 
Recovery  of  commissions  from  third  person  agreeing  to  pay  same  to 

promoter,  329-30,  514-7. 

Remedies  for  fraudulent  representations  of  promoter, 
Action  for  damages,  '330. 
Rescission  of  sale  induced  by,  330. 
Promoter  sometimes  compelled  to  make  representations  good,  308,. 

331,  306n.  12. 

False  representations  as  to  price  paid  for  property,  306-8,  330. 
As  to  liabilities  of  constituent  company,  331. 
Cancellation  of  secret  agreements,  332. 

REMEDIES  OF  INDIVIDUAL  STOCKHOLDERS: 
In  general,  436-51. 

Action  for  fraud  and  deceit  against  promoter,  436. 
Against  corporation,  437-8. 

Compelling  promoter  to  account  for  profits,  438. 
Rescission  of  subscriptions,   (See  Rescission). 

Subscribers  for  shares  of  abortive  corporation  (See  Abortive  promo- 
tions). 

REORGANIZATIONS : 

(See  also  Defenses.) 

In  general,  552. 

Authority  of  corporation  to  employ  promoter  to  reorganize  it,  552-3. 

When  in  hands  of  receiver,  553. 

Ultra  vires  reorganization,  553n.  2. 

Services  of  directors  impliedly  gratuitous,  553. 


INDEX.  635 

[References  are  to  pages,  except  that  numbers 
following   an   "n"   refer   to  notes.] 

REORGANIZATIONS— (Continued)  : 

Promoter  acting  under  express  agreement  must  show  performance,  554. 

Necessity  of  disclosing  promoter's  compensation,  554. 

Payment  of  promoter's  fees  not  fraud  upon  non-assenting  stock- 
holders, 555. 

Reorganization  In  fraud  of  minority  stockholders,  556. 

New  corporation  not  necessary  party  to  action  based  on  fraud  upon 
owners  of  securities  of  reorganized  corporation,  558. 

Rescission  at  suit  of  reorganized  company,  336n.  7. 

REPORTS : 

Quoted  in  prospectus — effect  of,  383n. 
Representation  in  regard  to,  404. 
Directors  Liability  Act,  375. 
Interpretation  of,  422. 

RES  JUDICATA : 

Effect  of  judgment  for  or  against  co-promoter,  298. 
Effect  of  judgment  in  relation  to  part  of  property  sold  to  corpora- 
tion, 262. 

RESCISSION : 

(See  also   Remedies   of  corporation,   Remedies  of  individual   stock* 

holders,  Pleading,  Law  and  Equity.) 
By  corporation 

Rescission  of  purchase  of  property  because  of  fraud  in  promotion 
by  vendor's  agents,  506,  518-20. 
Because  of  fraud  of  promoter,  330,  506-10,  518-20. 
Because  of  fraud  on  promoter,  506. 
Because  of  fraud  in  sale  of  shares,  433-5,  51H-20. 
Power  of  directors  to  determine  upon  rescission,  230. 
Power  of  majority  stockholders  to  determine  upon  rescission,  231. 
By  reorganized  company  or  assignee,  336n.  7. 
By  corporation  as  assignee  of  promoter's  contract,  Slln.  10. 
At  suit  of  minority  stockholder,  345-7. 
Parties  defendant  in  suit  for  rescission,  545-50. 
By  signers  of  certificate  of  incorporation,  443. 
By  subscribers  or  purchasers  of  shares, 

For  misrepresentations  of  promoters,  440-3. 
Of  inter-meddlers,  441-2. 


636  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to  notes.] 

RESCISSION— (Continued)  : 

Because  of  loose  conversations,  443n.  16. 
Misrepresentations  must  be  inducing  cause,  383-4. 
Subsequent  misrepresentations,  371,  444n.  19. 
Misunderstanding,  mismanagement,  etc.,  insufficient,  384. 
Matters  of  opinion  or  future  action,  443,  444n.  18. 
False  statements  subsequently  made  true,  384,  418-9. 
Rescission  because  of  innocent  misrepresentations,  381,  446. 

Executed  contracts,  383n. 

Where  subscriber  advised  promoter's  information  not  reliable,  3S3n. 
Because  of  innocent  ambiguity,  424-5. 
Concealment  of  facts,  384-8,  39Q-ln. 
Promoter's  secret  profit,  446. 
Misrepresentation  of  promoter's  interest,  447. 
Rescission  of  other  subscriptions,  411. 
Release  of  other  subscribers,  410n.  19. 
Variance  between  corporation  as  organized  and  as  planned, 

570-1,  572-3n.  37  and  38. 

Variance  between  draft  and  final  prospectus,  383n. 
When  lies  against  corporation,  444. 

Rescinding  subscriber  not  entitled  to  lien  on  corporate  property, 

442n.  15. 

Liability  of  promoters  for  return  of  subscription  price,  445-6,  453. 
Necessity  of  fraudulent  intent,  446. 
Not  liable  after  right  of  rescission  lost,  446. 
When  lies  against  promoters,  445. 
When  lies  against  syndicate  manager,  445n.  22. 
Necessity  of  restoring  status  quo,  448. 
Methods  of  effecting  rescission,  321,  449. 
Defending  suit  on  subscription  agreement,  450. 

After  insolvency  of  corporation,  473-8. 
Obtaining  cancellation  of  subscription  notes,  450-1. 
Must  disaffirm  promptly,  468-9. 
What  amounts  to  affirmance,  466-9. 
Disaffirmance  before  discovery  of  fraud,  473n.  66. 
After  insolvency  of  corporation,  473. 

RIGGING  THE  MARKET: 

(See  also  Wash  sales,  Criminal  liability  of  promoters.) 
Expenses  of,  not  allowed  to  promoters,  152-3. 


INDEX.  637 

[References  are  to  pages,  except  that  numbers 
following  an   "n"   refer  to  notes.] 


s. 

SECRET  PROFITS : 

(See  also  Purchase  and  re-sale  to  corporation,  Selling  property  to  cor- 

poration,  Remedies  of  corporation,  Defenses.) 
In  general,  170-198. 

Basis  of  rule  against,  171-*,  180,  186. 

Manner  of  taking,  174. 

Taking  shares  as  compensation  for  services,  175. 

Without  consideration,  176n.  13. 
Insignificant  profits,  175n.  12. 
Accepting  commission  from  vendors,  176. 
Accepting  gifts,  178,  195. 
Qualifying  shares,  178-9. 

Taking  agreement  to  re-purchase  qualifying  shares,  179. 
Purchase  of  property  and  re-sale  to  corporation,  180-2. 
Buying  in  liens  at  discount,  182. 
Collateral  agreements  with  contractors,  182-3. 
Secret  royalty  agreements,  183. 
Profits  made  in  sustaining  market,  183. 
Premiums  for  underwriting  risk  of  litigation,  184. 
Profits  of  business  transacted  pending  promotion,  184-6, 
Gift  of  interest  as  cloak  for  profit,  195. 

Secret  profit  as   basis  of  action  for  fraud  and  deceit  by  sub- 
scribers, 428. 

Under  English  Companies  Act,  429n.  85. 
By  creditors,  429n.  85. 
By  purchasers  of  shares,  429-32. 
As  basis  for  rescission  of  subscriptions,  446-7. 

Secret  profit  taken  from  co-promoters  as  basis  of  action  by  corpora- 
tion, 533-6. 

Promoters  when  liable  in  solido,  539. 
Liability  of  other  parties  sharing  promoter's  profits,  539n.  1 
Secret  profits  as  affecting  promoter's  right  to  compensation,  159,  300. 
As   affecting   promoter's   right    to    reimbursement   for   expenses, 

160n.  24. 

As  affecting  promoter's  right  to  enforce  other  cla 
As  affecting  promoter's  right  to  sue  as  minority  stockholder,  & 


638  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to   notes.] 

SELLING  PROPERTY  TO  CORPORATION: 

(See  Agreements  for  promotion  of  corporation,  Contracts  of  promo- 
ters, Options,  Conveyances,  Public  grants,  Franchises,  Surveys;  For 
matters  relating  to  sale  of  property  purchased  by  promoters  after 
commencement  of  relation,  see  Purchase  and  re-sale  to  corporation.) 
Distinctions  depending  upon  whether  property  acquired  before  or  after 

commencement  of  relation,  181-2,  187,  192,  220,  222-7,  301-5. 
When  property  deemed  acquired  by  promoter,  193-5. 

When  enforceable  contract  of  purchase  obtained,  193-4. 

Unenforceable  contract,  193n.  61. 

Contract  subsequently  modified,  196-7. 

Option  not  ownership,  193-5. 

Length  of  time  property  owned  by  promoter  not  material,  192. 

Property  acquired  by  gift,  195-6. 

Property  owned   before  commencement  of  relation  when  treated 

as  acquired  after,  198,  306-7,  483. 

When   relation   commences,    see   Commencement   of   relation   of    pro- 
moter. 
Promoter's  right  to  sell  property  to  corporation  regardless  of  cost, 

188,  222-7. 

Property  acquired  by  gift,  195-6,  222. 
Where  gift  to  promoter  cloak  for  secret  profit,  195. 
Promoter  need  not  disclose  cost,  222-7. 
Must  not  misrepresent  cost,  227. 
Cost  as  evidence  of  value,  223,  492, 
Cost  as  evidence  of  good  faith,  191n.  54. 
Must  disclose  interest,  188-9. 

And  other  material  facts,  189-90. 

Secret  interest  of  single  promoter  voids  transaction,  320. 
Must  see  that  property  worth  selling  price,  190-1. 
That  property  worth  selling  price  does  not  legalize  transaction,  190. 
Unlawful  sale — corporation  may  refuse  to  complete,  321. 
Implied  warranty  of  title,  191. 

SHAM  SUBSCRIPTIONS:  (See  False  representations.) 

SHARES : 

Right  to  issue  shares  in  payment  for  promoter's  services,  163n. 
When  services  gratuitously  rendered,  164. 


INDEX.  639 

[References  are  to  pages,  except  that  numbers 
following  an   "n"   refer  to  notes.] 

SHARES— (Continued)  : 

Issued  In  violation  of  statute 

Not  made  lawful  by  ratification,  228n.  74. 

Liability  of  promoters  on,  313-4,  488,  187n.  44. 

Effect  of,  on  agreement  to  promote  corporation,  33-4. 

Value   arising   from    combination    not    taken   into   consideration, 

191n.  54. 
Effect  of  statute  on  liability  for  promoter's  profits,  187,  204,  313-4, 

488-9. 
Effect  on  minority  stockholder's  suit,  282. 

SPECIFIC  PERFORMANCE: 

Of  agreements  to  promote  corporation,  56-64. 

Where  corporation  not  organized,  57. 

After  corporation  organized,  58. 

Contract  contemplating  partnership,  60n.  11. 

Where  performance  impossible,  61. 

Indefinite  agreements,  61-2. 

Discretion  of  court,  62. 

Defence  of  adequate  remedy  at  law,  58-61. 

Of  agreement  to  convey  property  to  corporation,  99-100,  135-6,  148-81 
Of  agreement  to  locate  railroad  route,  573n.  38. 

STATUS  QUO: 

Restoration  of,  as  a  condition  of  rescission,  70-1,  321,  448. 

As  a  condition  of  setting  aside  account  to  subscribers  of  abortive 
corporation,  577. 

STATUTE  OF  FRAUDS: 

Agreements  to  promote  corporation  to  purchase  specific  real  estate,  34. 

Agreement  of  promoter  to  furnish  money  to  perfect  title,  34n.  9. 

As  affecting  right  of  corporation  to  enforce  conveyance  of  property 

purchased  for  It  by  promoter,  136n.  27. 
Contracts  not  to  be  performed  within  one  year,  82-3. 

STATUTE  OF  LIMITATIONS,  290,  462,  311n.  24,  4fl9n.  56. 

In  minority  stockholders'  suits,  354n.  72. 

STOCK  CERTIFICATES : 
(See  also  Shares.) 
Constructive  notice  of  contents  of,  465-6. 


640  INDEX. 


[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to  notes.] 

STOCK  CERTIFICATES— (Continued)  : 

Liability  of  promoters  issuing  before  incorporation,  416. 

Suit  to  compel  corporation  to  issue,  pursuant  to  promotion  agreement, 

63-1. 
Liability  of  promoter  for  refusal,  of  corporation  to  issue,  45. 

STOCK  EXCHANGE:   (See  Certificates.) 

STOCK  LEDGER: 

Striking  name  from,  445. 

STOCKHOLDERS  OF  CORPORATION: 

(See   Stock   certificates,    Shares,   Minority  stockholders,    Subscribers, 

Purchasers  of  shares.) 
Fiduciary  relation  of  promoter  to  future  stockholders,  20-1. 

To  future  stockholders  other  than  original  subscribers,  21. 

To  what  extent  called  upon  to  suspect  fraud,  293,  459-61,  470,  478. 
Acts  or  acquiescence  of  transferors,  210-1,  213,  236,  253,  254-5,  283, 

343-4. 

Generally  entitled  to  rights  of  action  of  transferor,  21n.  60. 
Knowledge  of  transferors,  210-1,  213,  253. 
Knowledge  of  proxies,  471,  218n.  46. 

Knowledge  of  matters  transpiring  at  stockholders'  meeting,  217n.  46. 
Power  of  stockholders  to  act  for  corporation,  164,  209n.  28. 
Power  of  stockholders  to  fix  promoter's  compensation,  164. 

Effect  of  vote  where  promoter  holds  proxies  for  majority,  164n.  38. 
Power  of  stockholders  to  consent  to  promoter's  profits,  208-14. 

To  ratify  promoter's  profits,  227-32. 
Assent  of  all  stockholders  binding  upon  corporation,  236,  258. 

But  not  as  to  liability  on  unpaid  shares,  228n.  74. 

Does  not  bind  creditors,  210n.  29. 
Power  of  majority  stockholders, 

To  determine  upon  rescission,  231,  346-7. 

To  consent  to  or  ratify  promoters'  profits,  208-14,  228-32. 
Right  of  interested  promoter  to  vote  as,  232. 
Assumption  that  all  stand  on  same  footing,  173. 

As  to  future  relations,  173n.  8. 

SUBROGATION : 

Right  of  promoter  satisfying  obligations  assumed  by  corporation,  147. 


INDEX.  641 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to   notes.] 

SUBSCRIBERS : 

(See  also   Subscription  agreements,  Abortive  promotions.   Purchasers 

of  shares.) 

Fiduciary  relation  of  promoter  to,  18-20. 
To  future  subscribers,  20. 

To  those  subscribing  without  solicitation,  19-20n.  56,  447n.  29. 
Right  of  to  accept  special  inducement,  173-4. 
Right  to  assume  that  all  stand  on  same  basis  as  to  future  relations, 

173n.  8. 

Validity  of  agreement  of  promoter  to  re-purchase  shares,  413,  123n. 
Liability    for    paying   subscription    to    promoter   after    knowledge   of 

fraud,  350n.  55. 

Assignability  of  cause  of  action  against  promoter,  459n.  11. 
Liability  on  promoter's  contracts,  565,  143n.  55. 
To  what  extent  called  upon  to  susi>ect  fraud,  203,  459-61,  470,  478. 

SUBSCRIPTION  AGREEMENTS : 

(See  also  False  representations,  Rescission,  Evidence.) 

Status  pending  acceptance  by  corporation,  S5-S. 

Status  of  application  pending  acceptance  by  promoter,  880.  27. 

Not  binding  on  corporation,  85. 

Binding  effect  as  between  subscribers,  85-6,  122. 

Withdrawal  of  subscriber,  85-8. 

Notice  of  withdrawal,  SGn.  24. 
Application  for  shares  not  contract,  88n.  27. 
Enforcement  by  corporation,  85-8,  122,  134,  130n.  14. 
Where  statute  prescribes  method  of  taking,  87n. 
Must  be  de  jure  corporation,  87n. 

Rejection  by  corporation— liability  for  money  paid  to  promoter,  85n.  22. 
Varying  by  parol,  122,  408,  479. 
Collateral  promises  of  promoter,  122,  408,  479. 

Corporate  acceptance  of,  124. 
When  promoter  sole  party  interested,  122n.  94. 
Agreement  signed  in  blank,  123n. 
Conditions  precedent  to  enforcement,  123-4. 
Conditions  subsequent,  124. 

Promoter's  personal  liability  on  collateral  promtoM.  L 
Promoter  accountable  to  corporation  for  Instalments  received 
Right  of  corporation  to  sue  on  check  given  to  pre 
Delivery  of  agreement,  125. 


642  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to  notes.] 

SUBSCRIPTION  AGREEMENTS — (Continued)  : 
Delivery  in  escrow,  123n. 
Alterations  in,  383n. 
Effect  of  affirmance,  464-9. 

What  constitutes  affirmance,  466. 

Not  conclusive  unless  with  knowledge  of  facts,  465 

Effect  of  election  to  affirm,  469. 
Disaffirmance,  conclusive  effect  of,  459. 

What  constitutes  disaffirmance,  459. 

SUBSCRIPTION  NOTES : 

Fraud  of  promoters  as  defense  to,  450. 

Cancellation  of,  for  fraud,  450-1. 

Innocent  purchaser,  451n.  41. 

Given  for  shares  of  abortive  corporation,  569. 

SURETIES : 

On  treasurer's  bond,  liability  for  unlawful  payments  made  to  pro- 
moter, 331-2. 
Liability  of  vendors  as,  for  payment  to  corporation  of  commission  paid 

to  promoter,  516-7. 
Liability  of  promoters  as,  after  contract  assumed  by  corporation,  147. 

SURVEYS : 

Rights  of  corporation  under  surveys  made  by  promoter,  137n.  31. 
Made  by  promoter,  as  bar  to  condemnation  by  other  railroads,  137n.  31. 

SYNDICATES : 

Title  of  members  of  to  property  purchased  pending  promotion,  41. 

Status  of  promoter's  certificate  of  interest  in,  41. 

Liability  of  manager  for  return  of  moneys  paid  on  subscriptions  pro- 
cured by  fraud,  445n.  22. 

Liability  of  manager  on  contract  made  for  syndicate,  167n.  51. 

Fraud  on  syndicate  as  fraud  on  corporation,  239-42,  243-6,  259-60, 
533-6. 

Defense  that  syndicate  in  turn  defrauded  corporation,  279. 

Liability  of  promoter  for  fraud  upon,  528n.  2. 

Suits  by  one  member  on  behalf  of  associates,  435n.  2. 


INDEX.  643 


[References  are  to  pages,  except  that  numbers 
following  an   "n"   refer   to  notes.] 

T. 

TERMINATION  OF  RELATION: 

Depends  upon  particular  circumstances,  28-0. 

Not  until  scheme  completed,  28-9. 

Not  necessarily  coincident  with  legal  organization,  29. 

Relieves  promoter  from  fiduciary  obligations,  29. 

TORTS : 

Liability  of  promoters  for  personal  injuries,  141n. 
Liability  of  promoters  of  dc  facto  corporation,  5K3n.  02. 
Liability  of  corporation  assuming  debts  of  partnership,  ll«ln.  84. 

TREASURY  SHARES: 

(See  Donating  shares  to  corporation,  Lawful  profits.) 

U. 

ULTRA  VIRES: 

Corporation  cannot  assume  promoters'  contract  if  ultra  n'rej,  118-20. 
Corporation   engaging  in  ultra  vires   business,   liability  of  members, 
586n.  66. 

Effect  of,  on  enforcement  of  subscriptions,  572-3n.  38. 

UNDERWRITERS : 

Complaining  of  false  prospectus,  421-2. 
Release  by  variation  of  prospectus,  572n.  37. 

UNLAWFUL  PURPOSE: 
(See  also  Public  policy.) 

Liability  of  promoter  of  corporation  organized  for,  582a. 
Effect  of,  on  liability  of  subscribers,  124n.  97. 
Proof  of,  124n.  97. 
Agreement  to  organize  for,  not  enforceable,  32-4,  118-201 

V. 

VALUE: 

(See  Evidence.) 

Of  shares,  58-9,  64-8,  312~«,  487. 


644  INDEX. 

[References  are  to  pages,  except  that  numbers 
following   an   "  n "   refer   to  notes.] 

VALUE— (Continued)  : 

When  all  shares  issued  as  bonus,  314-5,  489. 

In  action  for  fraud  in  sale  of  shares,  498-500. 
Of  bonds  taken  by  promoters,  490. 
Of  property  sold  to  corporation,  490-3. 
False  representations  as  to  value  of  shares,  415,'  426,  400n.  81. 

VARIANCE : 

Between  corporation  as  planned  and  organized, 

Right  of  subscribers  to  rescind  subscriptions,  570-1. 

Or  to  follow  funds,  572n.  37. 
In  detail,  as  abandonment,  27,  571. 
Between  draft  prospectus  and  final  prospectus,  383n. 

VENDORS  TO  THE  CORPORATION: 

( See  Agreements  for  promotion  of  corporation,  Contracts  of  promoters, 
Selling  property  to  corporation,  Purchase  and  re-sale  to  corpora- 
tion, Conveyances,  Property  purchased  by  promoters.) 
Under  no  fiduciary  obligation,  9,  505-6. 
Liability  for  false  representations  made  to  promoters,  506. 

To  subscribers,  518,  506n.  2. 
For  fraud  of  agent,  506. 

For  fraud  of  promoters,  330,  506-10,  518,  525-6. 
For  fraud  of  promoters,  330,  506-10,  518,  525-6. 
For  fraud  in  sale  of  corporate  shares,  518. 
For  assisting  promoter  to  obtain  secret  profit,  510. 
Paying  commission  to  promoter,  329,  515. 
Liable  for  commission  agreed  to  be  paid  to  promoter,  329,  514. 

Effect  of  compromise  with  promoter,  515. 

Effect  of  receipt  by  corporation  of  moneys  paid  to  promoter  in 

settlement,  515n.  23. 
Validity  of  agreement  with  promoter  for  sale  to  corporation,  31-4. 

Enforcement  by  corporation,  130-9,  147-8. 

Enforcement  against  corporation,  74-125. 

Enforcement  by  promoter,  147-9. 

Enforcement  against  promoter,  139—47. 

Interpretation,  42-5. 

Liability  of  promoter  for  refusal  of  corporation  to  issue  certifi- 
cates to,  45. 
Liability  in  case  of  defective  title,  191-2. 


INDEX.  645 

[References  are  to  pages,  except  that  numbers 
B  following  an  "n"   refer   to  notes.] 

VENDORS  TO  THE  CORPORATION—  (  Continued  )  : 

Rights  of,  when  receiving  shares  in  payment,  521,  525-6,  437n.  3. 
When  receiving  bonds  in  payment,  523. 
Enforcing  vendor's  lien,  70. 
Rescinding  sale  to  corporation, 

Because  of  failure  to  organize  corporation,  68-7L 

Because  of  secret  profits  of  promoter,  521-3. 

Because  of  failure  of  corporation  to  carry  out  promoter's  promises, 


Recovery  of  value  of  property  conveyed  to  promoter,  70-1. 
Agreement  of  vendor  to  compensate  promoter,  47-0,  514-7. 
Rights  and  liabilities  inter  se  of  different  vendors,  525,  437n.  3. 
Joint  liability  upon  rescission  of  sale,  545. 

VOTING  : 

Right  of  interested  promoter  to  vote  as  stockholder,  232,  104n.  38. 

W. 

WAIVER  OF  DISCLOSURE,  218,  271-2. 
Under  English  Companies  Act,  392-3n. 

WASH  SALES,  416,  503. 

[Total  number  of  pages  TIL] 


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